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Digitized  by  the  Internet  Archive 

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http://www.archive.org/details/corporateorganiziOOconyrich 


"x  ii 


Corporate  Organization 
and  Management 

By 
THOMAS  CONYNGTON 

OF  THE  NEW   YORK  BAR 


Revised  by 

H.  POTTER 

OF  THE  NEW  YORK  BAR 


FOURTH  EDITION 
(Fourth   Printing) 


NEW  YORK 

THE    RONALD    PRESS    COMPANY 
1919 


^^. 


^1+ 


^0 


^1^ 


Copyright,  I903,  by 
The  Ronald  Press 

Copyright,  1904,  by 
The  Ronald  Press 

Copyright,  1908,  by 
The  Ronald  Press  Company 

Copyright,  191 1,  by 
The  Ronald  Press  Company 

Copyright,  1913,  by 
The  Ronald  Press  Company 

Copyright,  191 7,  by 
The  Ronald  Press  Company 

MAIN  LIBRARY 


,••  ••      •••• 

•     •        •  »••  «•••••  •  •  « 


/^ 


^Wlllam  G.  Hewitt  Press,  Brooklyn,  Printers 


PREFACE 

In  1903  the  author's  work  "Corporate  Management"  was 
pubHshed,  followed  in  1904  by  its  companion  volume,  "Cor- 
porate Organization."  Both  these  volumes  met  with  a  flat- 
tering reception  and  have  since  gone  through  a  number  of 
editions. 

In  the  two  volumes  there  was,  of  necessity,  much  dupli- 
cated matter,  such  as  the  discussions  of  charter  provisions, 
by-laws,  election  of  officers,  etc.,  etc.,  and  it  seemed  to  the 
author  that  a  combination  of  the  two  books  in  one  volume 
with  the  elimination  of  this  duplicated  material  would  give  a 
more  complete  and  more  convenient  work — one  that  would 
better  meet  the  needs  of  those  who  organize  and  manage  cor- 
porations. 

In  the  present  volume  this  has  been  done.  All  duplicated 
and  obsolete  material  has  been  deleted,  and  the  volume  as  a 
whole  has  been  brought  sharply  up  to  date.  While  this  has 
been  done,  no  necessary  material  has  been  omitted,  all  the 
valuable  features  of  both  volumes  being  retained. 

This  thorough  overhauling  of  the  material  of  the  present 
volume  has  necessitated  a  very  large  amount  of  work,  which 
has,  for  the  larger  part,  been  done— and  done  with  remark- 
able efficiency — by  Miss  Helen  Potter  of  the  New  York  Bar. 
Miss  Potter  has  gone  thoroughly  and  carefully  through  the 
two  volumes  to  be  combined,  eliminating,  correcting,  verify- 
ing, and  making  such  changes  as  the  late  court  decisions  and 
Federal  and  state  legislation  have  made  necessary. 

The  purpose  of  the  present  work  is  to  furnish  a  compact, 
practical,  and  conveniently  arranged  manual  of  corporation 
law   and   procedure — one   that    shall   meet  the    demands   of 

iii 


iy  PREFACE 

lawyers,  accountants,  corporation  officials,  and  business  men 
generally.  At  the  same  time  the  author  trusts  that  the  book 
may  meet  the  needs  of  that  continually  increasing  class,  the 
students  of  business,  for  a  reliable  and  fairly  comprehensive 
text  on  the  subject  of  corporations. 

While  the  present  volume  covers  as  far  as  may  be  the 
practical  details  of  incorporation,  an  equal  value  will  probably 
be  found  in  its  suggestions.  The  innumerable  variations  that 
arise  in  differing  incorporations  cannot  all  be  specifically 
covered.  The  methods,  the  discussions,  the  instances,  the 
procedure,  and  the  forms  given  do,  however,  cover  the  field 
so  completely  that  the  solution  of  any  particular  problem 
should  be  readily  drawn  from  the  suggestions  of  the  text. 

It  is  to  be  remembered  that  all  matters  of  business  law 
are  liable  to  be  affected  by  the  varying  and  continually  chang- 
ing laws  of  the  different  states.  This  is  particularly  true  of 
corporation  law,  and  any  complete  discussion  of  the  state 
statutes  that  modify  its  principles  is  utterly  precluded  in  this 
work  by  the  limits  of  space.  Therefore,  while  frequent 
reference  is  made  to  these  statutes  they  must  be  consulted 
in  each  state  for  any  accurate  determination  of  the  local  regu- 
lations and  requirements  of  that  state.  This  is  not,  h6wever, 
a  difficult  requirement,  for  in  all  the  more  prominent  corpora- 
tion states,  the  statutes  relating  to  corporations  can  either  be 
obtained  from  the  Department  of  State  for  the  asking,  or 
otherwise  can  be  purchased  in  convenient  pamphlet  form. 
Wherever  the  term  "statutes'*  is  used  in  the  present  volume, 
reference  is  intended  to  the  statutes  enacted  by  the  legislatures 
of  the  various  states,  and  not  to  the  Federal  Statutes,  unless  so 
specified. 

The  forms  of  the  present  volume  have  been  increased  in 
number  until  they  now  cover  practically  the  entire  range  of 
ordinary  corporate  organization  and  procedure.  As  in  pre- 
ceding editions,  they  are  given  as  precedents  and  without  the 


PREFACE  V 

usual  blanks  for  variable  matter.  The  author  believes  that  a 
better  idea  of  the  form  as  a  whole  is  thereby  conveyed.  Also, 
the  changes  necessary  to  adapt  a  form  to  any  special  need 
are  more  readily  made  from  a  completed  instrument  than 
from  one  disjointed  by  frequent  and  sometimes  puzzling 
blanks. 

In  conclusion  the  author  wishes  to  express  his  sincere 
appreciation  of  the  very  friendly  reception  accorded  the  pre- 
ceding editions  of  his  works  on  corporation  procedure.  He 
can  hardly  hope  for  a  more  favorable  reception  for  the  present 
volume,  but  he  trusts  that  the  new  form,  the  elimination  of 
duplicated  material,  and  the  changes  of  arrangement  have  re- 
sulted in  a  more  convenient,  and  possibly  a  more  valuable 
work. 

Thomas  Conyngton. 
New  York  City, 
August  I,  19 1 7. 


CONTENTS 


BOOK   I— THE   CORPORATE   SYSTEM 

Part   I — The   Corporate   Form 

Chapter  Page 

I    Advantages  of  the  Corporate  Form 3 

§  I.  Business  Organization 

2.  Characteristic  Features  of  Corporate  Form 

3.  (i)  Limited  Liability 

4.  (2)  Legal  Entity  of  Corporation 

5.  (3)   Permanence 

6.  (4)  Stock  System 

7.  (5)  Corporate  Mechanism 

8.  (6)  Attractiveness  to  Investors 

9.  Resume 

II    Disadvantages  of  the  Corporate  Form     ...     13 
§  10.    General 

11.  Onerous  Legislative  Requirements 

12.  Summary  of  Taxes  and  Reports 

Taxes 

13.  (i)  Organization  Taxes 

14.  (2)  Annual  Franchise  Taxes 
IS-    (3)  Annual  Property  Taxes 

16.  (4)  State  Income  Taxes 

17.  (5)  State  Inheritance  Taxes 

18.  (6)  Stock  Transfer  Taxes 

19.  (7)  Taxes  on  Foreign  Corporations 

20.  (8)  Federal  Taxes 

.  -  Reports 

21.  (i)  Local  Tax  Reports;  (2)  State  Tax  Re- 

ports 

22.  (3)  Federal  Tax  Reports 

23.  (4)  Annual  Reports 

24.  (5)  Reports  of  Foreign  Corporations 

Part    II — Pre-Incorporation    Considerations 

III     Subscription  Lists  and  Contracts 22 

§  25.    General 
26.    Nature  of  the  Subscription  Contract 
T.'j.    Form  of  Subscription  Contract 
^.   Underwriting  Agreements 

vil 


viii  CONTENTS 

Chapter                                                                                         Page 
IV    Contracts  Prior  to  Incorporation 31 

§29.  Status  of  Corporation  upon  Organization 

30.  Status  of  Contracting  Parties 

31.  Agreements  Among  Incorporators 

32.  Promotors'  Contracts 

33.  Option  Contracts 

34.  Trustees'  Contracts 

35.  Effect  of  Failure  to  Incorporate 

V    Where  to  Incorporate 39 

§  z'^.  General 

2,7.  Domestic  Incorporation 

38.  Foreign  Incorporation 

39.  Cheap  Incorporation 

40.  Reputation  of  Different  States 

41.  Liabilities  Imposed  in  Different  States 

42.  Protection  of  Minority  in  Different  States 

43.  General  Rules  for  Selection  of  State 

VI    Cost  of  Incorporation 149 

§  44.  General 

45.  Organization  Fees  and  Annual  Taxes 

46.  Avoiding  Fees  and  Taxation 

47.  Counsel  Fees 

48.  Corporate  Equipment 

Part  III — The    Stock    System 

Vll    The  Capitalization 58 

§  49.  Capital 

50.  Basis  of  Capitalization 

51.  Capitalization  at  Less  than  Real  Values 

52.  Capitalization  at  Real  Values 

53.  Capitalization  on  Earning  Capacity 

54.  Capitalization  of  Good-Will 

55.  Form  of  Capitalization 

56.  Bond  Issues 

57.  Capitalization  as  Affected  by  Financial  Ex- 
^  igencies 

VIII    Stock .    68 

§  s8.  Capital  Stock 

59.  Shares 

,  60.  Certificates  of  Stock 

61.  Unissued  Stock 

62.  Issued  Stock 

63.  Full-Paid  Stock 

64.  Common  and  Preferred  Stock 

65.  Other  Classifications 


CONTENTS 


IX 


Chapter                                                                                            Page 
IX     Preferred  Stock 78 

§  66.  Nature  and  Use 

67.  Preference  as  to  Dividends 

68.  Preference  as  to  Assets 

69.  Cumulative  Dividends 

70.  Participation  in  General  Dividends 

71.  Redemption  Right 
^2.  Voting  Rights 

'j}^.  Convertible  Stock 

74.  Founders'  Shares 

X    Full-Paid   Stock .     ■.     91 

§  75.    General 
76.   Watered  Stock 
'jy.   Legal  Status  of  Watered  Stock 

78.  Legal  Status  of  Full-Paid  Stock 

79.  Certificates  for  Full-Paid  Stock 

XI    Treasury  Stock .96 

§  80.    Definition 

81.  Origin 

82.  Transfers  to  Corporation 

83.  Transfers  from  Corporation 

84.  Legal  Status  of  Treasury  Stock 

85.  Stock  of  Other  Corporations  Held  in  Treas- 

ury- 
Part    IV — Corporate    Control 

XII    Stockholders 102 

§86.  General 

87.  Functions 

88.  Rights 

89.  (i)  Notice  of  Meetings  and  Voting 

90.  (2)  Dividends  and  Participation  Rights 

91.  (3)  Distribution  of  Assets  on  Dissolution 

92.  (4)  Inspection  of  Books 

93.  Special  Charter  Rights 

94.  Statutory  Rights 

95.  Powers 

96.  (i)  To  Amend  Charter 

97.  (2)  To  Adopt,  Repeal,  or  Amend  By-laws 

98.  (3)  To  Elect  Directors 

99.  (4)  To  Sell  Entire  Assets 

100.  (5)  To  Dissolve  the  Corporation 

loi.  (6)  Special  Powers 

102.  Liabilities 

XIII    Directors I18 

§  103.    Powers  of  Directors 
104.   Appointment  and  Removal  of  Officers  and 
Agents 


Chapter 


CONTENTS 


105.  Appointment  of  Standing  Committees 

106.  Adoption  of  By-Laws 

107.  Common  Law  Liability  of  Directors 

108.  Statutory  Liabilities  of  Directors 

109.  Resignation  of  Directors 
no.  Removal  of  Directors 

111.  Vacancies  on  the  Board 

112.  Directors  Holding  Over 

113.  Directors  Dealing  with  Corporation 


Page 


XIV    Officers 

§  114.  General 

115.  Appointment  of  Officers 

116.  Qualifications  of  Officers 

117.  Powers  and  Duties  of  Officers 

118.  Liabilities  of  Officers 

119.  De  Facto  Officers 

120.  Removals  and  Resignations 


BOOK    II— CORPORATE    ORGANIZATION 


Part    V— The    Charter 


XV     General  Considerations    . 
§  121.    Nature  of  Charter 

122.  Classification 

123.  Charter  Details 

124.  Application  for  Charter 


137 


XVI     Incorporators 

§  125.    Who  May  Incorporate 

126.  Number  of  Incorporators 

127.  Functions  of  Incorporators 

128.  Incorporators  as  Stockholders 

129.  Dummy  Incorporators 


144 


XVII    The  Corporate  Name 

§  130.    How  Secured 

131.  Selection  of  Name 

132.  Right  to  Corporate  Name 

133.  Changing  the  Corporate  Name 


XVIII    The  Corporate  Purposes   .     . 
§  134.    General 

135.  Single  Purpose 

136.  Comprehensive  Purposes 

137.  Illegal  Purposes 

138.  Things  "Ultra  Vires" 


149 


154 


CONTENTS  XI 

Chapter  Page 

XIX     Stock  Clauses .,     .     .     .159 

§  139,    General 

140.  Classifications 

141.  Common  Stock 

142.  Preferred  Stock 

XX    Location  and  Duration  of  Corporations    .     .     .   162 

§  143.  Domestic  and  Foreign  Corporations 

144.  Selection  of  State 

145.  Principal  Office 

146.  Duration 

XXI     The   Board  of  Directors 165 

§  147.  Qualifications 

148.  Number 

149.  Authority 

150.  Power  to  Pass  By-Laws 

151.  Classification 

152.  Standing  Committees 

XXII     Special  Provisions 172 

§  153.  General 

154.  Usual  Objects  of  Special  Provisions 

155.  Cumulative  Voting 

156.  Classification  of  Stock 

157.  Corporate  Stockholding 

158.  Limitations  on  Indebtedness 

159.  Limitations  on  Salaries 

160.  Sundry  Provisions 

XXIII  Execution  and  Filing  of  Charter 181 

§  161.  General 

162.  Signing  and  Acknowledgment 

163.  Filing 

164.  Certified  Copies 

XXIV  Amendment  of  Charter 186 

§  165.    General 

166.  Subject  Matter 

167.  Procedure 


Part    VI— The    By-Laws 

XXV    general  Considerations     .     .     ..••.,.  188 

§  168.    Functions  of  By-Laws 

169.  Subject  Matter 

170.  Power  to  Make 


xii  CONTENTS 

Chapter  Page 

171.  Arrangement 

172.  Preparation 

173.  Adoption  of  First  By-Laws 

XXVI    By-Law  Provisions  Relating  to  Stock  .     .     .     .195 

§  174.  Preliminary 

175.  Certificates  of  Stock 

176.  Transfers  of  Stock 

177.  Transfer  Agent  and  Registrar 

178.  Stock  and  Transfer  Books 

179.  Preferred  Stock 

180.  Treasury  Stock 

181.  Lost  Certificates 

XXVII    By-Law  Provisions  Relating  to  Stockholders    .  201 

§  182.  Annual  Meetings 

183.  Special  Meetings 

184.  Officers  of  Meetings 

185.  Notice  of  Meetings 

186.  Voting 

187.  Certified  List  of  Stockholders 

188.  Election  of  Directors 

189.  Quorum 

190.  Proxies 

191.  Order  of  Business 

XXVIII    By-Law  Provisions  Relating  to  Directors     .     .  208 

§  192.  General  Considerations 

193.  Number  and  Qualifications 

194.  General  Powers 

195.  Term  of  Office 

196.  Classification 

197.  Removal 

198.  Vacancies 

199.  Meetings 

200.  Notice  of  Meetings 

201.  Quorum 

202.  Election  of  Officers 

203.  Removal  of  Officers 

204.  Compensation  of  Directors 

205.  Power  to  Pass  By-Laws 

206.  Order  of  Business 

XXIX    By-Law  Provisions  Relating  to  Standing  Com- 
mittees     218 

§207.  Purpose 

208.  Appointment 

209.  Composition 

210.  Powers 

211.  Procedure 


CONTENTS  xiii 

Chapter  Page 

XXX    By-Law  Provisions  Relating  to  Officers  .     .     .  225 

§  212.  Enumeration 

213.  Presiding  Officers 

214.  Secretary 

215.  Treasurer 

216.  Managing  Officers 

217.  Counsel;  Auditor 
2x8.  Assistant  Officers 

219.  Delegation  of  Official  Powers 

220.  Salaries 

221.  Removals;  Vacancies 

XXXI     By-Law  Provisions  Relating  to  Dividends  and 

Finance 233 

§  222.  General 

223.  Dividends 

224.  Reserve  Funds 

225.  Limitations  of  Debt 

226.  Bank  Deposits 

XXXII     Sundry  Provisions 236 

§  227.  General 

228.  Corporate  Seal 

229.  Penalties 

230.  Amendments 

Part    VII — Organization    Meetings 

XXXIII  First  Meeting  of  Stockholders 239 

§  231.  General 

232.  Preparation  of  Minutes 

233.  Conduct  of  First  Meetings 

234.  Opening  the  First  Meeting  of  Stockholders 

235.  Reception  of  Charter 

236.  Adoption  of  By-Laws 

237.  Election  of  Directors 

238.  Exchange  of  Stock  for  Property 

239.  Other  Business 

XXXIV  First  Meeting  of  Directors 249 

§  240.  Calling  the  Meeting 

241.  Minutes 

242.  Opening  the  First  Meeting  of  Directors 

243.  Election  of  Officers 

244.  Adoption  of  Stock  Certificate 

245.  Acceptance  of  Subscriptions 

246.  Exchange  of  Stock  for  Property 

247.  Treasurer's  Bond;  Depositary 

248.  Other  Business 


xiv  CONTENTS 

BOOK    III— CORPORATE    MANAGEMENT 
Part    VIII — Stock    Records    and    Stock    Transfer 

Chapter  Page 

XXXV    The  Siock  Records 261 

§249.  Transfer  on  Books  of  Corporation 

250.  Stock  Certificate  Book 

251.  Stock  Ledger  and  Stock  Book 

252.  Transfer  Book 

253.  Closing  the  Books 

XXXVI     Transfer  of  Stock 271 

§254.  Procedure  of  Transfer 

255.  Transfer  of  Treasury  Stock 

256.  Transfer  Agent  and  Registrar 

257.  Lost  and  Stolen  Certificates 

258.  Pledges  of  Stock 

259.  Restrictions  on  Transfers 

260.  Lien  of  Corporation 

XXXVII     Rules  Regulating  Transfers 287 

§261.    Responsibility  of  Corporation  as  to  Trans- 
fers 

262.  Duties  of  Officers  as  to  Transfers 

263.  Who  May  Transfer  Stock 

264.  To  Whom  Stock  May  be  Transferred 

265.  Liability  Involved  in  Transfers 

266.  Form  of  Transfer 

267.  Transfers  to  and  by  Agents 

268.  Transfers  to  and  by  Agents  and  Adminis- 

trators 

269.  Transfers  to  and  by  Trustees 

270.  "  "       "      •'     Minors 

271.  ''  "      "     "     Guardians 
^2.            "  "      "     "     Corporations 

273.  "  "       "      "     Partnerships 

274.  Summary  of  Rules  Regulating  Transfers 

XXXVIII     Stock  Transfer  Tax 303 

§  275.    General 

276.  Duties  and  Penalties 

277.  General  Rulings 

Part    IX — Meetings    and    Records 

XXXIX     Annual  Meeting  of  Stockholders 306 

§  278.    The  Annual  Meeting 

279.  Closing  Transfer  Books 

280.  Notice  of  Annual  Meeting 

281.  Preparations  for  Annual  Meeting 


CONTENTS 


XV 


Chapter  Page 

282.  Officers  of  Meetings 

283.  Opening  the  Meeting 

284.  Roll-Call 

285.  Proxies 

286.  Quorum 

287.  Proof  of  Notice 

288.  Reading  of  Minutes 

289.  Annual  Reports 

290.  Election  of  Directors 

291.  Voting  at  Elections 

292.  Other  Business 

293.  Adjournment 

294.  Signing  Minutes 

XL     Special  Meetings  of  Stockholders 325 

§  295,  Special  or  Called  Meetings 

296.  Call  for  Meeting 

297.  Notice  of  Special  Meeting 

298.  Consent  Meetings 

299.  Opening  Formalities 

300.  Special  Business 

301.  Adjournment 

XLI     Meetings   of  Directors  and  of   Standing   Com- 
mittees     331 

Directors 

§302.  Time  of  Meetings 

303.  Place  of  Meetings 

304.  Purposes  of  Meetings 

305.  Assembling  Meetings 

306.  Call  for  Special  Meetings 

307.  Notice  of  Special  Meetings 

308.  Call  and  Waiver  of  Notice 

309.  Consent  Meetings 

310.  Opening  Directors'  Meetings 

311.  Quorum 

312.  Reading  the  Minutes 
:             313.  Reports 

314.  Unfinished  and  New  Business 

315.  Adjournment 

Standing  Committees 

316.  Procedure  at  Meetings 

XLII     Minutes  of  Meetings 342 

§  317.  The  Corporate  Books 

318.  The  Minute  Book 

319.  Contents  of  Minute  Book 

320.  Form  and  Subject  Matter  of  Minutes 

321.  Recording  the  Proceedings 

322.  Approval  and  Amendment  of  Minutes 

323.  "Cut  and  Dried  Minutes" 


xvi  CONTENTS 

Part    X — The    Treasurer 
Chapter  Page 

XLIII    Duties  and  Powers  of  the  Treasurer   ....  350 
§  324.    General 

325.  The  Treasurer's  Primary  Duty 

326.  The  Treasurer's  Authority 
2,2'].   By-Law  Provisions 

328.  Director's  Resolutions 

329.  Books  of  Account 

330.  Assumption  of  Official  Duties 

331.  Formalities  of  Giving  up  Office 

XLIV    Relation    of    Treasurer    to    Other    Corporate 

Authorities 358 

%ZZ2.    To  the  Stockholders 

333.  To  the  Board  of  Directors 

334.  To  the  Finance  Committee 

335.  To  the  Auditor 

2,Z^.   To  the  Other  Officials 

XLV    The  Treasurer's  Liabilities 366 

%2iZ7'  The  Treasurer  as  Agent 

338.  To  Whom  Liable 

339.  Sources  of  Liability 

340.  (i)  Neglect    of    or    Non-Performance    of 

Duties 

341.  (2)  Faulty  Performance  of  Duties 

342.  (3)  Unauthorized  Acts 

343.  (4)   Illegal  Acts 

344.  Statutory  Liabilities 

XL VI    The  Treasurer's  Bond 375 

§345.  General 

346.  Statutory  Requirements 

347.  Corporate  Requirements 

348.  Nature  of  the  Bond 

349.  Amount  of  Bond 

350.  Personal  Bonds 

351.  Surety  Company  Bonds 

352.  Liability  of  Bondsmen 

353.  Termination  of  Bond 

XLVII    The  Treasurer's  Reports 387 

§354.    The  Report  to  Directors 
355.    Report  to  Stockholders 

Part    XI — The    Corporate    Finances 

XLVIII     The  Corporate  Funds 390 

§  356..  General 


CONTENTS  xvii 

Chapter  Page 

357.  Collections 

358.  Status  of  Treasurer  as  to  Corporate  Funds 

359.  Custody  of  Corporate  Funds 

360.  Disbursement  of  Corporate  Funds 

361.  Return  of  Corporate  Funds 

XLIX     Dividends 396 

§  362.  Declaration  of  Dividends 

363.  Profits  and  Dividends 

364.  Equality  of  Dividends 

365.  Compelling  the  Declaration  of  Dividends 

366.  Status  of  Declared  Dividends 

L    Dividends  (Continued) 407 

§  z'^y.  Form  of  Dividends 

368.  Cash  Dividends 

369.  Dividends  Not  in  Cash 

370.  (i)  Stock  Dividends 

371.  (2)  Bond  Dividends 

372.  (3)  Scrip  Dividends 
27Z.  (4)  Property  Dividends 

374.  Notice  of  Dividends 

375.  To  Whom  Paid 

376.  Payment  of  Dividends 
Z77.  Illegal  Dividends 

378.  Liability  for  Illegal  Dividends 

379.  Treasurer's  Liability  as  to  Dividends 

LI     Bonds 423 

§  380.  Nature  of  a  Bond 

381.  Authorization  of  Bond  Issues 

382.  Statutory  Provisions 

383.  Debentures 

384.  Mortgage  Bonds 

385.  Coupon  Bonds 

386.  Form  of  Bond 

387.  Form  and  Nature  of  Coupon 

388.  Trustee's  Certificate 

389.  Deeds  of  Trust 

390.  Recitals  of  Deed  of  Trust 

391.  Execution  and  Filing  of  Deed  of  Trust 

392.  Sinking  Fund 

393.  Sale  of  Bonds 

394.  Liabilities  of  Vendor 

395.  Rights  of  Holders 

396.  Redemption  of  Bonds 

397.  Investment  Value  of  Bonds 

398.  Kinds  of  Bonds 

399.  Short-Term  Notes 


xviii  CONTENTS 

BOOK    IV— SPECIAL    CORPORATE    TOPICS 

Part    XII — Corporate    Arrangements 

Chapter                                                                                                  Page 
LII     Voting  Trusts 445 

§  400.    General 

401.  Distinctions 

402.  How  Formed 

403.  Legal  Status 

404.  Illegal  Voting  Trust 

405.  Restriction  of  Stock  Sales 

LIII     Holding  Corporations 450 

§  406.  General 

407.  Incidental  Powers  to  Hold  Stock 

408.  Authorization  to  Hold  Stock 

409.  What  Holdings  Carry  Control 

410.  Its  Function  in  Industrial  Combination 

411.  Limitations  on  Use  of  Holding  Companies 

412.  Parent  Companies 

LIV     Concerning  Promoters 460 

§  413.    The  Promoter's  Function 

414.  The  Promoter's  Relation  to  Corporation 

415.  Illegal  Arrangements 

416.  Legitimate  Arrangements 

417.  Incidental  Liabilities  of  Promoter  and  Cor- 

poration 

418.  Restrictions  on  Sale  of  Stock 

419.  Underwriting 

LV    Protection  of  Minority 473 

§  420.  General 

421.  Rights  of  Minority  at  Common  Law 

422.  Encroachment  on  Minority  Rights 

423.  Protective  Measures 

424.  Cumulative  Voting 

425.  Classification  of  Stock 

426.  Voting  Trusts 

427.  Special  Arrangements 

428.  Annual  Audits 

429.  Charter  Limitations 

430.  Legal  Remedies 


LVI     Incorporating  a  Partnership     .     .     . 

§431.  General 

432.  Name 

433-  Capitalization 

434.  Exchange  of  Property  for  Stock 

435.  Stock  Adjustments 

436.  Board  of  Directors 


CONTENTS  xix 

Chapter  Page 

437.  Maintenance  of  Agreed  Management 

438.  Officers 

439.  Close  Corporations  and  Their  Conduct 

440.  Restricting  the  Sale  of  Stock 

LVII     Consolidation,  Reorganization,  and  Dissolution  506 
§  441.    Forms  of  Consolidation 

442.  Statutory  Consolidation 

443.  Consolidation  by  Sale  or  Lease  of  Assets 

444.  Consolidation   by    Purchase   of    Controlling 

Interest 

445.  Combinations 

446.  Reorganization 

447.  Dissolution 

Part    XIII — Allied    Forms    of    Organization 

LVIII     Joint-Stock   Companies  and   Partnership  Asso- 
ciations         513 

§  448.    Joint-Stock  Companies 

449.  Partnership  Associations 

450.  Syndicates  and  Joint  Adventures 

LIX    Associations  Under  Deeds  of  Trust     ....   520 

§  451.  Introductory 

452.  Express  Trusts 

453-  Voluntary  Associations  in  Massachusetts 

454.  Nature  of  the  Voluntary  Association 

455.  Liability  Under  the  Voluntary  Association 

456.  Regulation  of  Voluntary  Associations 

457.  Liability  to  Taxation 

458.  Advantages  of  the  Voluntary  Association 

LX     Plan  for  Stock  Partnership 533 

§  459.    A  Suggested  Form  of  Partnership 
460.    Plan  for  Suggested  Form  of  Partnership 
-  461.    Advantages  of  Suggested  Form  of  Partner- 

ship 


BOOK    V— FORMS    AND    PRECEDENTS 

LXI     Charter  Forms 543 

Form 

1.  Delaware  Charter 

2.  New  Jersey  Charter  (U.  S.  Steel  Corp.) 

3.  New  York  Charter 

4.  New    York    Charter — Stock    Without    Par 

Value 


XX  CONTENTS 

Chapter                                                                                            Page 
LXII     Special  Charter  Clauses 555 

Form 

5.  Special  Purpose  Clauses 

LXIII     By-Law  Forms 573 

Form 

6.  By-Laws-^Simple  Form 

7.  By-Laws — Extended  Form 

LXIV    Forms  of  Subscription  Lists 584 

Form 

8.  Subscription  List — Simple  Form 

9.  Subscription  Blank — Individual 

10.  Subscription  to  Bank  Stock — Individual 

11.  Letter  Accompanying  Blank 

12.  Subscription  List — Trustee's 

13.  Subscription     List — Agreement    with     Pro' 

moters 

LXV    Receipts  for  Stock  Subscriptions 590 

Form 

14.  Trustee's  Receipt 

15.  Treasurer's  Receipt  for  Instalment 

16.  Treasurer's  Receipt  for  Stock  Subscription 

17.  Stock  Scrip 

18.  Indorsement  Form  for  Stock  Scrip 

19.  Assignment  of  Subscription  and  Payments 

LXVI    Stock  Certificates  and  Stock  Books    ....  595 

Stock  Certificates 

Form 

20.  Stock  Certificate — Common 

21.  Stock  Cerificate — Preferred 

22.  Assignment  of  Stock  Certificate 

23.  Stock  Transfer  Book 

24.  Stock  Book  or  Stock  Ledger 

25.  Stock  Book  to  be  Kept  by  Brokers   (New 

York  Form  Prescribed  by  Comptroller) 

26.  Stock  Book  to  be  Kept  by  Corporations 

and  Transfer  Agents  (New  York  Form 
Prescribed  by  Comptroller) 

LXVII    Voting  Trust  Forms 606 

Form 

27.  Voting  Trust  Agreement 

28.  Voting  Trustees'  Cerificate 

29.  Assignment  of  Voting  Trustees'  Certificate 


CONTENTS        .  xxi 

Chapter                                                                                               Page 
LXVIII    Forms  for  First  Meetings 609 

Form 

30.  Minutes  of  Stockholders'  Meeting 

31.  Call  and  Waiver  of  Notice — Stockholders* 

32.  Proxy 

33.  Inspectors'  Oath  and  Report 

-<  34.  Waiver  of  Notice  of  Assessment 

35.  Minutes — Directors' 

36.  Call  and  Waiver — Directors' 

37.  Secretary's  Oath  of  Office 

38.  Proposal  to  Exchange  Property  for  Stock 

39.  Assignment  of  Subscriptions 

40.  Call  for  First  Directors'  Meeting 

41.  Secretary's  Certificate  to  Resolution 

LXIX    Option  Agreements 625 

Form 

42.  Option  on  Capital  Stock 

43.  Option  on  Business  and  Property 

44.  Option  on  Real  Estate 

45.  Assignment  of  Option 

LXX    Calls  and  Waivers  for  Stockholders'  Meetings  .  631 

Form 

46.  Call  and  Waiver  for  Special  Meeting 

47.  President's  Call  for  Special  Meeting 

48.  "  "        "        "  "       —Formal 

49.  Directors'  Call  for  Special  Meeting 

50.  Directors'  Instructions  for  Special  Meeting 

51.  Directors'  Resolution  for  Special  Meeting 

52.  Stockholders'  Request  for  Special  Meeting 

53.  President's    Indorsement    of    Stockholders' 

Request 

54.  Stockholders'  Call  for  Special  Meeting 

LXXI    Calls  and  Waivers  for  Directors'  Meetings  .     .  638 

Form 

55.  Call  and  Waiver  for  Special  Meeting 

56.  Agreement  for  Consent  Meeting 

57.  President's  Call  for  Special  Meeting 

58.  Directors'  Call  for  Special  Meeting 

LXXII    Notices  of  Meetings 641 

Form 

59.  Notice  of  Special  Meeting  of  Stockholders 

60.  Publication   Notice   of   Special    Meeting  of 

Stockholders 

61.  Publication   Notice   of   Special   Meeting  of 

Stockholders 

62.  Notice  of  Annual  Meeting 


xxii  ♦         CONTENTS 

Chapter  Page 

63.  Notice    of    Annual    Meeting    (U.    S.    Steel 

Corp.) 

64.  Publication  Notice  of  Annual  Meeting 

65.  "  "        " 

66.  Publication  Notice  of  Annual  Meeting   (U. 

P.  R.  R.  Co.) 

67.  Notice  of  Special  Meeting  of  Directors 

68.  Notice  of  Regular  Meeting  of  Directors 

LXXIII     Forms  of  Proxies 648 

Form 
6g.    Proxy — Simple  Form 

70.  "     — Unlimited 

71.  "     — Tim.e  Limited 

72.  "     — Particular  Meeting 

73.  "     — Limited  as  to  Stock 

74.  "     — Annual  Meeting — Formal 

75.  Corporate  Proxy 

76.  Revocation  of  Proxy 

LXXIV    Motions  and  Resolutions 656 

Motions 
Form 

77.  Motion  to  Receive  President's  Report 

78.  "        Instructing  Secretary  to  Cast  Vote 

79.  "        Instructing  Secretary  to  Cast  Vote — 

Formal 

80.  "        to  Amend  By-Laws 

81.  ;;        to  Pay  Bills 

82.  "        to  Employ  General  Manager 

83.  "        to    Appoint    an    Investigating    Com- 

mittee 

Resolutions 

84.  Stockholders'  Resolution  for  Sale  of  Entire 

Assets 

85.  Stockholders'  Resolution  Authorizing  Con- 

solidation 

86.  Stockholders'  Resolution  to  Amend  By-Laws 

87.  Directors'    Resolution    to    Open    Bank   Ac- 

count 

88.  Directors'    Resolution    Designating    Deposi- 

tary 

89.  Directors'  Resolution  Designating  Bank 

90.  Directors'  Resolution  Authorizing  Issue  of 

Stock 

91.  Directors'  Resolution  Authorizing  Contract 

92.  Directors'  Resolution  Declaring  Dividend 

93.  Directors'    Resolution    Declaring    Dividend 

— Preferred  Stock 

94.  Direx:tors'    Resolution    Declaring    Dividend 

— Preferred  and  Common  Stock 


CONTENTS  xxiii 

Chapter  Page 

95.  Directors*  Resolution  Appointing  Managing 

Director 

96.  Directors'  Resolution  Calling  Special  Meet- 

ing of  Stockholders 

97.  Directors'  Resolution  to  Sell  Bonds 

98.  Directors'  Resolution  to  Purchase  Property 

99.  Directors'     Resolution     for     Settlement    of 

Claim 
100.    Directors'     Resolution     Ratifying     Sale    of 

Property 
loi.    Directors'  Resolution  Removing  Officer 

102.  Directors'  Resolution  for  Sale  of  Entire  As- 

sets 

LXXV    Incidental  Forms 667 

Form 

103.  Secretary's  List  of  Stockholders 

104.  Outline  Minutes  for  Annual  Meeting 

105.  Oath  of  Inspectors  of  Election — New  York 

106.  Certificate  of  Inspectors  of  Election — New 

York 

107.  Acknowledgment  of  Inspectors'  Certificate 

108.  Certificate  of  Inspectors  of  Election — Gen- 

eral 

109.  Ballot  at  Annual  Meeting 

no.    Ballot  at  Annual  Meeting — Formal 

LXXVI    Minutes  of  Corporate  Meetings 674 

Form 

111.  Minutes  of  Annual  Meeting  of  Stockholders 

112.  Minutes  of  Special  Meeting  of  Stockholders 

113.  Minutes  of  Adjourned   Meeting  of   Stock- 

holders 

114.  Minutes  of  Regular  Meeting  of  Directors 

115.  Minutes  of  Adjourned  Meeting  of  Directors 

116.  Minutes  of  Special  Meeting  of  Directors 

LXXVII     Reports 682 

Form 

117.  President's  Annual  Report  to  Stockholders 

118.  Treasurer's  Annual  Report  to  Stockholders 

119.  Introduction  to  Treasurer's  Report 

120.  Report  of  Committee  on  By-Laws 

LXXVIII    Miscellaneous  Notices 689 

Assessment  Notices 
Form 

121.  Instalment  Notice 

122.  Notice  of  Stock  Assessment 

123.  Notice  of  Stock  Assessment — Statutory 

124.  Notice  of  Sale  of  Delinquent  Stock 


xxiv  CONTENTS 

Chapter  Page 

Dividend  Notices 

125.  Dividend  Notice — Mailing 

126.  "  "     — Publication 

127.  Notice  Accompaning  Dividend  Check 

128.  Dividend  Notice 

129.  Dividend  Notice — Common  Stock 

130.  Dividend    Notice — Common   and    Preferred 

Stock 

131.  Dividend  Notice — Mailing  Orders  Requested 

132.  Mailing  Order  for  Dividends 

Notices  of  Appointment 

133.  Notice  of  Election  as  Director 

134.  Notice  of  Election  as  Director — Acceptance 

Requested 

135.  Notice  of  Election  as  General  Manager 

136.  Tender  of  Position  as  Sales  Manager 

LXXIX    Resignations .698 

Form 

137.  Resignation  of  Director 

138.  Resignation  of  Director — Effective  on  Ac- 

ceptance 

139.  Resignation  of  Director — Peremptory 

140.  Resignation  of  Director — Future  Date 

141.  Resignation  of  President — Conditional 

142.  Resignation  of  Treasurer 

LXXX    Corporate  and  Official  Signatures      .     .     .     .703 

Form 

143.  Official  Signature — Informal 

144.  "  "  — Formal 

145.  Corporate  Signature — Informal 

146.  **  "  — Formal 

147.  Testimonium  Clause — Corporate  Signature — 

Seal  Attested 

148.  Testimonium  Clause — Two  Corporate  Signa- 

tures 

149.  Testimonium    Clause — Corporate   and    Indi- 

vidual Signatures 

150.  Testimonium  Clause — Signature  Affixed  by 

Agent 

LXXXI    Checks,  Receipts,  and  Notes 708 

Corporate  Checks 
Form 

151.  Check — Corporate  Signature 

152.  "  — Countersigned 

153.  "  — Official  Signatures 

154.  "  —      "  "  — Purpose  Stated 

155.  "  —Draft  Form 


CONTENTS  XXV 

Chapter  Page 

156.  Dividend  Check 

157.  Indorsement  of  Corporate  Check 

158.  "  "    Check  for  Deposit 

159.  Corporate  Draft 

Corporate  Receipts 
Form 

160.  Corporate  Receipt 

161.  "  "      — Official  Signature 

162.  Dividend  Receipt 

Corporate  Notes 

163.  Corporate  Note — By  President 

164.  Corporate  Note — By  Treasurer 

165.  Collateral  Note — On  Demand 

166.  Corporate  Note — Collateral  Security 

LXXXII    Certifications 718 

Form 

167.  Certificate  to  Service  of  Notice 

168.  Affidavit  to  Service  of  Notice 

169.  Affidavit  to  Publication  of  Notice  by  Secre- 

tary 

170.  Certified  Resolution  Designating  Bank 

171.  Certification  of  Resolution  Designating  Bank 

172.  Certification  of  Resolution 

173.  Certificate  of  Election  of  Treasurer 
174-  "  "        "         "    Officers 

175.  Certification  of  Transcript  from  By-laws 

176.  Certification  of  Transcript  from  Minutes 

177.  Certification  of  Minutes — President  and  Sec- 

retary 

178.  Secretary's  Affidavit  to  Minutes 

179.  Notarial  Exemplification  of  Minutes 

180.  Treasurer's    Affidavit    to    Corporate    State- 

ment 

181.  Notarial  Acknowledgment — New  York 

LXXXIII     Powers    of    Attorney,    Contracts,    and   Assign- 
ments       726 

Powers  of  Attorney 
Form 

182.  Power  of  Attorney — To  Receive  Dividends 

183.  Power  of  Attorney — To  Collect  Money 

184.  Power  of  Attorney — ^To  Make  Delivery  of 

Deed 

185.  Power  of  Attorney — To  Manage,  Sell,  and 

Deed  Land 

186.  Revocation  of  Power  of  Attorney 

Corporate  Contracts 

187.  Corporate  Contract 

188.  Corporate  Bill  of  Sale 


XXVI 


Chapter 


LXXXIV 


LXXXV 


LXXXVI 


LXXXVII 


CONTENTS 

Page 

Assignments 

189.  Assignment  of  Contract 

190.  Assent  to  Assignment  of  Contract 

191.  Assignment  of  Contract — Indorsement  Form 

192.  Assignment   of    Patent — Individual   to    Cor- 

poration 

Instalment  and  Dividend  Books 736 

Form 

193.  Instalment  Book 
.     194.    Dividend  Book 

Bonds  of  Indemnity 739 

Form 

195.  Treasurer's  Bond — Personal 

196.  Indemnity  Bond  for  Lost  Stock  Certificate 

The  Corporate  Calendar 742 

Form 

197.  Corporate  Calendar — New  York 

Corporate  Bond  Issues 746 

Form 

198.  Coupon  Bond 

199.  Coupon 

200.  Trustee's  Certificate 

201.  Deed  of  Trust 


Corporate  Organization 
and  Management 


BOOK  I 
THE  CORPORATE  SYSTEM 


Corporate   Organization 
and   Management 

Part  I — The  Corporate  Form 


CHAPTER    I 

ADVANTAGES  OF  THE  CORPORATE  FORM 

§  I.     Business  Organization 

Modern  commercial  and  industrial  activity  require  a  form 
of  organization  under  which  management  and  capital  may 
safely  combine  for  the  conduct  of  business  undertakings. 

The  usual  forms  of  business  organization  are  the  part- 
nership and  the  corporation.  A  partnership  is  satisfactory 
under  some  circumstances,  and  has  a  lack  of  formality  that  is 
attractive;  but  where  it  is  desired  to  limit  individual  liability 
or  the  rights  of  those  interested,  or  where  large  interests  are 
involved,  or  where  it  is  desired  to  secure  investment  of  capi- 
tal from  those  not  connected  with  the  management,  the  en- 
terprise must  usually  be  conducted  under  the  corporate  form. 

Other  forms  of  business  organization,  derived  or  evolved 
from  partnership  or  corporate  origins,  have  been  tried,  such  as 
the  partnership  associations  of  Pennsylvania  and  Michigan, 
the  statutory  joint-stock  company  of  New  York,  and  associa- 
tions under  declarations  of  trust  in  Massachusetts,  but  as  yet 
none  have  won  general  favor.     (See  Chapters  LVIII,  LIX.) 

It  is  probable  that  the  future  will  see  the  evolution  of  im- 
proved forms  of  business  organization.  Entirely  new  forms 
may  be  devised.     Present  forms  may  be  bettered.     Partner- 

3 


4     '''- 1  ' '' ;  y : '-,'  ' ??f E  CO J^I^ORATE  FORM 

ships  may  perhaps  be  allowed  to  secure  additional  capital  by- 
issuing  non-voting  certificates  of  stock,  entitling  the  holder 
to  participate  in  profits  without  involving  him  in  liability. 
Intelligent  legislation  could  make  the  corporate  form  far  more 
useful  than  it  now  is.  The  effective  co-operation  of  men  with 
business  ability  and  men  with  capital  is  the  end  to  be  sought. 
Legislation  should  be  had  by  which  this  end  may  be  achieved. 

§  2.     Characteristic  Features  of  Corporate  Form 

As  already  stated,  there  are  but  two  forms  of  business 
combination  commonly  used  for  conducting  a  business  or 
an  enterprise — the  partnership  and  the  corporation.  The  one 
is.  easily  entered  into,  and  as  easily  dissolved ;  the  other  is  for- 
mal and  more  permanent.  Men  may  drift  into  partnership; 
the  law  frequently  implies  it  for  them,  or  it  may  be  made  by 
a  simple  verbal  agreement.  Incorporation,  on  the  contrary, 
may  be  had  only  by  deliberate  purpose,  carried  into  effect 
through  prescribed  forms  of  law.  A  partnership  may,  and 
frequently  does,  exist  without  the  knowledge  of  the  partners ; 
an  incorporation  is  impossible  except  with  the  formally  ex- 
pressed concurrence  and  participation  of  all  the  parties. 

The  general  and  steadily  increasing  preference  for  the  cor- 
poration over  the  partnership  as  a  form  of  business  organiza- 
tion is  due  to  the  very  material  advantages  offered  by  the 
corporation,  which  may  be  summarized  as  follows: 

1.  Its  limitation  of  stockholders'  liabilities  to  a  definite 

amount. 

2.  Its  distinct  legal  entity  for  all  business  purposes. 

3.  The  stability  and  permanence  of  its  organization. 

4.  The  representation  of  the  different  interests  in  the 

corporation  and  its  property  by  transferable  shares. 

5.  The  management  of  the  business  by  an  elected  board 

of  directors,  acting  through  officers  and  agents. 


ADVANTAGES  5 

6.  The  greater  ease  of  securing  capital  under  the  cor- 
porate form  because  of  its  safeguards  and  ad- 
vantages. 

These  characteristic  features  of  the  corporate  form  are 
severally  considered  in  the  following  sections  of  the  present 
chapter. 

§  3.     (i)  Limited  Liability 

The  subscriber  to  stock  and  the  holder  of  stock  not  fully 
paid  for  are  liable  to  the  corporation,  and  indirectly  to  its 
creditors,  up  to  the  par  value  of  their  stock.  In  other  words, 
if  a  corporation  becomes  insolvent,  a  subscriber  to  its  stock 
whose  subscription  is  not  fully  paid,  or  a  holder  of  stock  not 
fully  paid  for,  can  be  held  liable  for  the  corporate  debts  up  to 
the  amount  necessary  to  make  his  stock  fully  paid.  In  most 
states  of  the  Union  a  subscription  to  stock  or  the  holding  of 
stock  involves  no  further  liability  than  this,  and  as  soon  as 
the  face  value  of  stock  is  paid  this  liability  ceases  and  the 
holder  is  no  longer,  as  a  stockholder,  responsible  for  the  cor- 
poration and  its  doings.^     (See  §§41,  102.) 

In  a  few  states  there  are  additional  liabilities.  Thus, 
in  Minnesota  the  stockholder  is  liable,  in  case  the  corporation 
becomes  insolvent,  for  a  further  amount  equal  to  his  original 
subscription,  that  is,  equal  to  the  par  value  of  the  stock  he 
holds.  The  corporation  cannot  collect  this  additional  amount, 
but  in  case  of  its  insolvency  any  creditor  of  the  corporation 
may  enforce  payment.  This  double  liability  formerly  existed 
in  several  other  states,  but  is  now  found  in  Minnesota  alone. 
In  California  each  stockholder  is  liable  for  any  portion  of  his 
subscription  that  is  not  paid,  and  is  further  liable  for  such 
proportionate  part  of  the  corporate  indebtedness  incurred 
during  the  period  in  which  he  is  a  stockholder  as  his  stock 


^i   Cook  on  Corp.,   §§2x2,  213,  214,  241,  242;  United  States  v.   Stanford,   161   U.   S. 
(1896). 


5  THE   CORPORATE   FORM 

bears  to  the  total  capitalization  of  the  corporation.  Stock- 
holders in  national  banks,  and  generally  stockholders  in  banks, 
trust  companies,  and  other  moneyed  corporations,  are,  in 
addition  to  any  subscription  liability,  held  liable  for  an 
amount  equal  to  the  par  value  of  their  stock  in  case  of  the 
insolvency  of  their  corporation.  In  some  few  states  stock- 
holders may  be  held  for  any  debt  due  by  a  corporation  to  a 
laborer,  servant,  or  other  employee. 

The  liability  on  unpaid  stock  is  generally  understood  and 
is  not  inequitable.  The  further  statutory  liabilities,  save  those 
of  moneyed  corporations,  are  unfortunate,  because  of  lack  of 
uniformity  and  their  uncertain  action.  Not  infrequently  they 
work  serious  hardships  where  stock  is  purchased  in  ignorance 
of  their  existence.  They  are  always  productive  of  litigation 
and  the  states  in  which  they  are  found  are  to  be  avoided  for 
purposes  of  incorporation.     (See  §  41.) 

These  statutory  liabilities,  however,  are  exceptional  and, 
in  the  great  majority  of  the  states,  the  one  general  rule  pre- 
vails that  a  stockholder  whose  stock  has  once  been  paid  in  full 
is  liable  neither  to  assessment  by  the  corporation  nor  to  action 
by  its  creditors.  The  property  of  the  corporation  in  which  he 
is  interested  may  be  swept  away,  but  his  liability  is  fixed  and 
limited.  His  investment  will  be  lost  but  that  is  the  worst  that 
can  happen.  The  unlimited  responsibility  of  the  partnership 
does  not  exist. 

§  4.     (2)  Legal  Entity  of  Corporation 

In  the  partnership  every  member  must  be  made  a  party 
to  all  actions  at  law  either  by  or  against  the  firm,  and  no  part- 
ner may  sue  or  be  sued  by  the  partnership  as  a  partnership. 
He  cannot  contract  with  his  firm,  nor  enforce  its  obligations 
to  him.  The  great  inconvenience  of  this  is  manifest.  On  oc- 
casion it  results  in  serious  loss  and  injustice.  It  is  a  material 
defect  of  the  system. 


ADVANTAGES  - 

The  corporation,  on  the  contrary,  is  a  distinct  legal  entity, 
entirely  apart  from  its  membership.  It  may  sue  and  be  sued 
under  the  corporate  name.  It  may  contract  freely  with  its 
stockholders  and  even,  under  proper  conditions,  with  its  officers 
and  directors.  It  may  bring  suit  to  enforce  these  contracts, 
and  in  turn  may  be  sued  by  stockholders,  officers,  or  directors. 
In  short,  for  all  purposes  of  ordinary  business  the  corpora- 
tion has  a  distinct,  individual  existence  of  its  own.^ 

§5-     (3)  Permanence 

The  partnership  depends  for  its  continued  existence  upon 
the  continued  life,  sanity,  solvency,  and  consent  of  each  one  of 
its  members.  It  is  always  readily,  and  often  unavoidably,  ter- 
minated. This  easy  and,  at  times,  undesirable  dissolution  is 
disturbing,  and,  with  its  possible  resulting  loss  of  business 
and  good-will,  is  a  serious  defect  of  the  system. 

In  the  corporation,  permanence  and  stability  are  charac- 
teristic features.     The  organization  endures  until  terminated 

( 1 )  by  voluntary  dissolution,  which  must  usually  though  not 
invariably  be  by  unanimous  consent  of  the  stockholders,  or 

(2)  by  the  expiration  of  the  period  for  which  it  was  formed, 
or  (3)  by  judicial  proceedings,  or  (4)  by  forfeiture  of  charter 
by  the  state.  These  are  the  only  methods  recognized  by  law 
by  which  the  corporation  may  be  terminated.  The  lives,  the 
mental  or  financial  condition  of  its  stockholders,  the  antago- 
nism of  an  individual  or  faction,  need  have  no  effect  on  its 
existence.  This  permanence  adds  materially  to  the  value  and 
efficiency  of  the  corporation  as  a  mechanism  for  the  transaction 
of  business. 

In  some  few  states  the  maximum  term  for  which  charters 
are  granted  is  twenty  years.  In  others  it  is  fifty.  In  others 
there  is  no  limitation,  and  the  duration  of  the  corporation  may 


-I   Kyd  on   Corp.,  p.    13,;  Angells  &  Ames  on  Corp.,   §  i;   i   Cook  on   Corp.,   §§  i, 
6,  11;  Trustees  of  Dartmouth  College  v.   Woodward,  4  Wheaton  (U.   S.)  518  (1819)- 


g  THE   CORPORATE   FORM 

be  fixed  at  any  desired  period,  or  may — at  least  in  theory — 
be  made  perpetual.^ 

§  6.     (4)   Stock  System 

In  a  partnership  there  is  no  satisfactory  or  generally 
recognized  method  of  expressing  and  representing  the  indi- 
vidual interests  of  the  partners.  Nor  is  there  any  way,  save 
by  consent  of  all  the  parties  interested,  by  which  a  partner  may 
transfer  his  interest  in  whole  or  in  part  to  another  person. 
Such  a  transfer,  unless  by  general  agreement,  dissolves  the 
firm. 

In  stock  corporations  the  exact  reverse  obtains.  Under  a 
fixed  and  well-ordered  system,  the  various  interests  of  the 
parties  in  whom  the  ownership  of  the  corporation  rests  are  ex- 
pressed as  equal  parts,  or  shares,  of  the  whole.  These  shares 
are,  as  a  matter  of  convenience,  represented  by  quasi-negoti- 
able certificates  of  stock,  which  may  be  transferred  as  desired 
with  but  little  formality  and  without  affecting  the  operations 
of  the  corporate  business.  Each  stockholder  votes  according 
to  the  number  of  shares  he  holds,  and  participates  in  dividends 
in  like  proportion.  The  convenience  and  the  obvious  business 
advantages  of  this  method  of  holding  and  transferring  interests 
in  the  corporation  are  the  most  attractive  features  of  the  cor- 
porate system. 

§  7-     (5)  Corporate  Mechanism 

The  partnership  has  no  definite  method  of  action  or  sys- 
tem of  management.  Any  partner  may  bind  the  partnership 
within  the  scope  of  its  business  and  no  one  partner  has  any 
more  legal  authority  than  another  in  partnership  affairs.  There 
is  no  legal  way  of  enforcing  the  wishes  or  decisions  of  the 
majority.     On  the  other  hand,  the  stable,  well-defined,  and 


»2  Cook  on  Corp.,  §  628;  Swan,  etc.,  Co.  v.  Frank,  148  U.  S.  603  (1893.). 


ADVANTAGES  g 

orderly  system  of  administration  characteristic  of  the  cor- 
poration is  one  of  its  most  admirable  and  important  features. 
The  election  of  a  board  of  directors  by  the  stockholders  vot- 
ing according  to  their  stock  interests,  the  election  of  officers 
and  the  appointment  of  agents  by  this  board  for  the  direct  con- 
duct of  the  business,  the  supervision  and  control  of  these  offi- 
cers and  agents  by  the  board,  the  orderly  action  of  the  board 
as  a  body  at  meetings  called  in  accordance  with  by-law  or 
charter  requirements — these  constitute  the  best  working 
mechanism  for  the  conduct  of  a  business  enterprise  that  has 
yet  been  devised. 

The  several  functions  of  the  stockholders,  directors,  and 
officers,  the  well-defined  laws  and  usages  governing  every  fea- 
ture of  corporate  operation,  the  records  to  be  kept,  the  reports 
to  be  made,  and  the  protection  afforded  its  members,  combine 
to  make  a  system  compared  with  which  the  workings  of  the 
ordinary  partnership  are  crude  and  inadequate. 

The  corporate  organization  may  be  and  should  be  based 
on  a  division  of  powers  and  duties  and  the  operation  of  mutual 
checks  and  balances.  If  well  arranged  and  properly  conducted 
its  operation  is  effective  and  satisfactory.  It  must  be  observed, 
however,  that  the  ideal  corporate  organization  is  not  ordinarily 
attained,  being  lost  through  ignorance,  negligence,  or  lack  of 
experience.  Safeguards  and  checks  are  omitted  or  purposely 
set  aside  by  promoters  and  exploiters ;  a  charter  and  by-laws 
well  adapted  for  one  corporation  often  are  stupidly  duplicated 
for  the  use  of  another  corporation  of  wholly  different  design 
and  purpose ;  frequently  measures  of  protection  or  convenience 
are  omitted  through  sheer  ignorance  on  the  part  of  the  incor- 
porators. 

To  avoid  such  errors,  and,  with  due  regard  to  the  rights 
of  all  concerned,  to  secure  an  effective  and  smoothly  working 
corporate  mechanism,  requires  skill  and  intelligence  in  the 
organization  of  the  corporation.    To  maintain  its  proper  oper- 


lO  THE   CORPORATE   FORM 

ation  thereafter  demands  an  honest,  capable  administration 
and  watchful  care  on  the  part  of  those  interested. 

It  may  be  stated  in  passing  that  no  system  of  conducting 
business  has  been  or  can  be  devised  that  will  protect  the  in- 
terests of  those  concerned  automatically  and  without  effort  on 
their  part.  Our  corporation  laws  are,  it  must  be  admitted,  far 
from  perfect,  but  the  best  laws  are  of  no  effect  unless  enforced, 
and  the  most  effectual  and  well-devised  system  of  business 
organization  may  be  turned  to  evil  ends  unless  efforts  in  this 
direction  are  opposed.  All  that  can  or  should  be  done  by  the 
corporate  organization  is  to  afford  the  weak  an  opportunity  to 
protect  themselves  should  the  need  arise.  If  they  will  not  avail 
themselves  of  such  opportunity  when  the  time  comes,  it  is  they 
who  are  at  fault,  not  the  system. 

§  8.     (6)  Attractiveness  to  Investors 

Speaking  generally,  any  considerable  combination  of  capi- 
tal is  impossible  under  the  partnership  system.  No  matter 
what  the  merits  of  the  enterprise  nor  how  great  the  induce- 
ments offered,  they  are  outweighed  by  the  dangerous  liabilities 
and  uncertain  operation  of  the  unincorporated  form.  For  this 
reason  any  appeal  to  the  investing  public  on  the  basis  of  a 
partnership  or  joint- stock  association  is  foredoomed  to 
failure. 

On  the  other  hand,  the  corporate  form  has .  been  found 
most  attractive  to  investors.  It  enables  them  to  invest  or  par- 
ticipate to  a  definite  extent  without  rendering  themselves  in- 
definitely liable.  It  has  a  continued  period  of  duration,  usually 
lasting  until  insolvency  or  voluntary  liquidation.  The  busi- 
ness interest  obtained  may  be  sold,  transferred,  or  transmitted 
to  posterity  with  little  formality  and  without  material  expense. 
Its  mechanism  operates  in  well-defined  grooves  and  the  rights 
and  liabilities  of  all  concerned  are  well  known.  It  has  its 
own  personality,  and  stockholders  are  not  involved  by  its  ac- 


ADVANTAGES  I I 

tions,  nor  are  they  responsible  for  its  obligations  beyond  their 
liability,  if  any,  on  stock. 

For  these  reasons,  if  it  is  desired  to  raise  capital  for  an 
enterprise  or  to  increase  the  amount  already  invested,  the  ob- 
vious method  and  the  one  almost  invariably  pursued  is  to  in- 
corporate the  undertaking  and  sell  the  securities  of  the  com- 
pany so  formed. 

In  this  connection  it  may  be  observed  that  if  the  attrac- 
tiveness of  the  corporation  as  a  field  for  investment  is  to  be  pre- 
served, it  is  essential  that  those  features  which  serve  to  protect 
the  interests  of  the  investor  shall  be  maintained  and  their 
scope  enlarged.  Under  existing  laws,  it  has  happened  many 
times  that  exorbitant  and  even  fraudulent  prices  have  been 
paid  for  the  properties  taken  over  by  newly  organized  corpo- 
rations. Undue  power  and  emoluments  have  been  given  to 
the  original  promoters.  Rights  of  minority  stockholders  have 
been  denied,  and  the  smaller  investors  have  been  debarred  from 
any  knowledge  of  the  inner  corporate  operations. 

The  immediate  result  of  such  practices  has  been  very 
prejudicial  to  promotion.  Much  money  that  would  otherwise 
have  been  available  for  the  development  of  new  enterprises 
has  gone  into  the  better  known  bonds  and  particularly  into 
the  safe  haven  of  the  savings  bank,  where  returns  are  small 
but  where  all  the  conditions  are  clearly  defined  and  both 
principal  and  profits  are  secure. 

§  9.     Resume 

From  the  preceding  considerations  it  seems  that  the  char- 
acteristic features  of  the  corporate  form  which  have  led  to  its 
extended  use  are:  (i)  its  efficiency,  which  is  curtailed  only  by 
ignorance  or  lack  of  skill  in  its  organization;  (2)  its  con- 
venience, which  is  inherent  in  the  corporate  system  and  re- 
quires no  special  attention;  (3)  its  safety,  which  is  the  one 
point  above  all  others  that  requires  attention,  not  only  because 


12  THE   CORPORATE   FORM 

it  is  the  one  most  apt  to  be  overlooked,  neglected,  or  omitted  by 
intent,  but  because  it  is  the  most  important  feature  of  any- 
business  enterprise  in  which  a  number  of  people  are  concerned. 
The  corporation  is,  from  its  nature,  a  democratic  institu- 
tion and  the  safety  of  the  investors'  interests  should  be  a  first 
essential.  The  majority  must  rule,  but  the  rights  of  the  mi- 
nority demand  that  this  rule  be  fair,  open,  and  honest.  Due 
adjustment  of  all  equities  should  be  made  so  that  all  interests 
are  represented,  none  are  favored  at  the  expense  of  others,  the 
general  business  is  facilitated,  and  the  profits  are  fairly  ap- 
portioned. This  is  the  true  ideal  of  corporate  organization, 
and  that  corporation  is  the  most  ably  organized  and  conducted 
which  most  nearly  approaches  this  ideal. 


CHAPTER    II 

DISADVANTAGES    OF    THE    CORPORATE    FORM 

§10.     General 

The  corporate  form  has  its  advantages  and  also  its  dis- 
advantages. Its  advantages  have  been  discussed  with  some 
detail  in  the  preceding  chapter.  Its  disadvantages — discussed 
in  the  present  chapter — lie  mainly  in  the  somewhat  invidious 
taxes  imposed  upon  corporations  and  the  somewhat  onerous 
reports  required  of  them  by  state  and  federal  legislation.  The 
objection  so  frequently  urged  against  the  corporate  form  that 
it  does  not  afford  protection  to  minority  interests  is  considered 
elsewhere. 

§11.     Onerous  Legislative  Requirements 

Within  the  last  few  years  the  costs  and  burdens  imposed 
on  corporations  by  the  legislatures  of  the  various  states  and 
finally  by  federal  legislation  have  materially  increased — so 
much  so  that  before  deciding  in  any  specific  case  to  incorporate 
a  business  it  is  advisable  to  investigate  carefully  and  deter- 
mine just  what  obligations  the  proposed  incorporation  will 
entail. 

Where  it  is  desired  to  secure  the  investments  of  a  number 
of  people  in  a  business  enterprise,  incorporation  offers  such 
advantages  that  it  is  practically  the  only  possible  form,  and  in 
such  cases  the  only  recourse  is  to  minimize  the  disadvantages 
as  far  as  may  be  done.  Not  infrequently,  however,  when  the 
incorporation  of  an  existing  partnership  or  individual  business 
is  under  consideration,  the  conscientious  lawyer  is  compelled  to 
counsel  against  such  a  step  and  advise  his  clients  to  bear  the 

13 


14  THE   CORPORATE   FORM 

ills  they  have  rather  than  to  incur  the  taxes,  annual  reports, 
and  other  onerous  burdens  imposed  on  corporations. 

According  to  a  famous  French  minister,  the  whole  prob- 
lem of  taxation  is,  as  in  plucking  geese,  to  secure  the  most 
feathers  with  the  least  squawking.  Proceeding  upon  this 
primitive  principle,  both  state  and  national  legislators  have 
found  the  line  of  least  resistance  in  the  corporation  and  have 
taxed  it  unreasonably. 

As  a  matter  of  fact  and  fairness,  private  corporations 
should  not  pay  higher  taxes  or  be  called  upon  for  more  oner- 
ous reports  than  individuals  or  partnerships  engaged  in  like 
enterprises,  save  as  to  the  small  fees  for  filing  and  recording 
where  corporate  instruments  are  required  to  be  filed  in  public 
offices.  The  business  corporation,  as  such,  enjoys  no  franchise 
or  monopoly ;  it  merely  employs  a  convenient  form  of  business 
organization.  If  this  form  facilitates  the  transaction  of  busi- 
ness and  is  superior  to  the  partnership  form  of  business 
organization,  its  use  should  be  encouraged,  not  hindered. 

Holding  corporations  and  trust  combinations  should  be 
prohibited  if  they  are  harmful,  for  taxes  levied  on  them  are 
no  compensation  for  the  harm  they  do,  and  do  not  benefit  those 
who  suffer  from  their  abuse  of  power ;  public  utility  corpora- 
tions may  well  pay  some  compensation  to  the  public  for  the 
monopolies  they  enjoy,  either  in  increased  taxes  or  in  the  form 
of  regulated  rates ;  but  the  ordinary  private  corporation  should 
not  be  hampered  unnecessarily  in  any  way,  and  should  be  taxed 
only  for  the  property  it  holds  and  at  no  higher  rate  than 
individuals  and  partnerships. 

In  those  localities  where  it  is  customary  to  discourage 
enterprise  and  punish  industry  by  levying  occupation  taxes, 
corporations  should  pay  the  same  as  individuals  and  partner- 
ships but  no  more.  In  other  words,  the  corporate  form  should 
bear  its  part  of  the  burden  of  taxation  but  should  not  be 
handicapped  with  more. 


DISADVANTAGES  je 

§  12.     Summary  of  Taxes  and  Reports 

The  taxes  and  reports  required  of  corporations  may  be 
generally  summarized  as  follows: 

Taxes : 

1.  Organization  taxes  payable  to  the  state  of  incor- 

poration. 

2.  Annual  franchise  taxes  paid  to  the  state  of  incor- 

poration. 

3.  Annual  taxes  on  property. 

4.  State  income  taxes. 

5.  State  inheritance  taxes  (in  most  states). 

6.  Stock  transfer  taxes   (in  New  York,  Massachu- 

setts, and  Pennsylvania). 

7.  Taxes  and  license  fees  in  each  state  outside  the 

home  state  in  which  the  corporation  does  busi- 
ness. 

8.  Federal  taxes. 

Reports : 

1 .  Local  tax  reports. 

2.  State  tax  reports. 

3.  Federal  tax  reports. 

4.  Annual  reports  of  officers,  etc. 

5.  Reports  in  each  state  outside  the  home  state  in 

which  the  corporation  does  business. 

These  corporate  taxes  and  reports  will  be  severally  con- 
sidered in  the  following  sections. 

Taxes 
§  13.     (i)  Organization  Taxes 

These  are  taxes  imposed  by  the  state  as  a  preliminary  to 
incorporation.  They  range  from  a  nominal  fee,  as  in  Arizona, 
to  a  tax  of  one-third  of  one  per  cent  on  the  entire  authorized 
capital  stock,  as  in  Pennsylvania.     In  connection  with  the  tax 


l5  THE   CORPORATE   FORM 

there  are  included  sundry  filing  fees  that  increase  the  total. 
In  themselves,  the  organization  tax  and  fees  are  not  serious  as 
they  have  to  be  paid  but  once.  (See  Chapter  VI,  "Cost  of 
Incorporation.") 

§  14.     (2)  Annual  Franchise  Taxes 

The  amount  of  the  annual  franchise  tax,  as  in  the  case  of 
the  organization  tax,  varies  widely.  In  Louisiana,  Nevada, 
and  some  few  other  states,  there  is  no  franchise  tax,  and  from 
this  it  ranges  up  to  one-half  of  one  per  cent  on  actual  values  in 
Pennsylvania.  The  tax  is  a  distinct  special  imposition  upon 
the  corporate  form — a  payment  for  the  privilege  of  transact- 
ing business  as  a  corporation.  It  is  in  addition  to,  and  entirely 
separate  from,  the  annual  property  taxes  mentioned  in  the  next 
section.  The  franchise  tax,  while  not  entirely  equitable,  is  a 
source  of  much  revenue  to  the  more  important  incorporating 
states.     (See  §  45.) 

§  15-     (3)  Annual  Property  Taxes 

These  are  the  same  in  character  and  amount  as  the  prop- 
erty taxes  paid  by  individuals  and  are  therefore  justly  imposed 
on  corporations.  The  corporation,  however,  is  at  some  dis- 
advantage in  this  matter,  as  it  cannot  evade  the  taxes  in  the 
very  facile  way  that  individuals  do.  This  being  true,  it 
frequently  happens  that  an  incorporated  business  pays  a  much 
larger  property  tax  than  it  did  before  incorporation,  even 
though  its  property  holdings  have  not  increased.  The  property 
tax  is,  however,  the  one  corporation  tax  to  which  no  just  ex- 
ception can  be  taken.  It  is  theoretically  at  least  uniform,  equi- 
table, and  proper. 

§  16.     (4)  State  Income  Taxes 

Several  states,  notably.  Massachusetts,  Wisconsin,  Con- 
necticut, West  Virginia,  impose  a  tax  upon  the  net  incomes  of 


DISADVANTAGES  I^ 

corporations  from  business  transacted  and  capital  invested  in 
the  state.  In  each  of  these  states  the  tax  is  upon  the  income  of 
all  corporations  doing  business  in  the  state,  foreign  as  well  as 
domestic.  In  West  Virginia  the  tax  is  an  excise  tax  imposed 
for  the  privilege  of  doing  business  within  the  state.  Neither 
Wisconsin  nor  Connecticut  impose  any  annual  franchise  tax 
upon  corporations,  but  in  West  Virginia  the  excise  tax  is  in 
addition  to  the  other  usual  taxes,  making  the  corporate  burden 
a  heavy  one. 

New  York  has  recently  imposed  a  3  per  cent  tax  upon 
the  net  income  of  two  classes  of  corporations,  "manufactur- 
ing" and  "mercantile"  corporations.  The  tax  is  denominated 
a  franchise  tax  but  a  new  feature  is  that  it  exempts  the  cor- 
porations subject  to  the  act  from  all  personal  property  taxes. 
As  in  the  other  states,  the  tax  applies  to  foreign  as  well  as 
domestic  corporations  and  when  only  a  portion  of  the  com- 
pany's business  is  transacted  within  the  state  the  tax  is  pro- 
portionately reduced. 

§  17.     (5)   State  Inheritance  Taxes 

An  inheritance  tax  is  now  imposed  in  all  of  the  more  im- 
portant states,  and  when  incorporation  is  contemplated  the  in- 
heritance tax  laws  of  the  state  of  incorporation  are  an  element 
to  be  considered,  especially  in  the  case  where  the  incorporation 
is  to  take  place  in  a  state  other  than  the  state  where  the  new 
company  does  most  of  its  business.  Under  such  circumstances 
there  may  in  some  cases  be  double  and  even  triple  taxation  by 
the  states. 

If  the  state  in  which  the  decedent  resided  has  an  inheritance 
tax,  the  transfer  will  be  taxable  in  that  state  irrespective  of 
whether  the  stock  held  by  the  decedent  is  stock  of  a  foreign 
or  a  domestic  corporation.  If  the  corporation  is  a  foreign 
corporation  a  second  tax  may  be  imposed  in  the  state  of  in- 
corporation, depending  upon  whether  that  state  imposes  a  tax 


x8  THE   CORPORATE   FORM 

upon  the  devolution  of  stock  in  a  domestic  corporation  held 
by  a  non-resident. 

In  New  Jersey,  stock  in  a  domestic  corporation  held  by  a 
non-resident  decedent  is  subject  to  the  inheritance  tax,  while 
in  Massachusetts  and  Delaware  it  is  not.  In  New  York,  stock 
held  by  a  non-resident  decedent  is  not  subject  to  the  inheritance 
tax  unless  the  corporation  holds  real  property  in  New  York 
in  which  case  the  stock  is  subject  to  a  tax  for  such  proportion 
of  its  value  as  the  real  property  held  by  the  corporation  in 
New  York  State  bears  to  the  entire  property  of  the  corpora- 
tion. The  law  applies  to  stock  in  both  foreign  and  domestic 
corporations,  but  excepts  from  its  provisions  certain  classes 
of  corporations,  including  transportation,  moneyed,^  and 
manufacturing  companies.  At  the  present  time  stock  in  a  New 
Jersey  corporation  which  owns  real  estate  in  New  York,  that 
is  held  by  a  decedent  residing  in  Delaware,  might  be  subject 
to  taxation  under  the  inheritance  laws  of  Delaware,  New 
Jersey,  and  New  York. 

Usually  the  corporation  is  required  either  to  collect  the 
taxes  or  to  refuse  transfer  of  the  stock  on  its  books  until  the 
tax  has  been  piaid  or  a  waiver  is  obtained  from  the  state  officer 
charged  with  the  collection  of  the  tax. 

§  i8.     (6)  Stock  Transfer  Taxes 

In  New  York,  Massachusetts,  and  Pennsylvania  a  stamp 
tax  of  two  cents  on  each  $ioo  of  face  value  is  imposed  on 
every  sale  or  transfer  of  stock  in  the  state,  whether  the  cor- 
poration is  domestic  or  foreign.  The  statutes  of  the  various 
states  and  the  rulings  thereunder  are  very  similar.  In  addition 
to  the  money  fines  imposed  for  failure  to  comply  with  the  law, 
the  statutes  of  each  state  provide  that  a  transfer  of  stock 
made  without  paying  the  tax  cannot  be  made  the  basis  of  any 


1 A   "moneyed"   corporation   is   a   bank,   trust   company,   or   other   financial    insti- 
tution. 


DISADVANTAGES  19 

action  or  proceeding  in  the  state  courts.  A  share  of  stock 
sold  in  one  of  the  three  states  named  and  transferred  in 
another  is  taxable  in  both  jurisdictions. 

§  19.     (7)  Taxes  on  Foreign  Corporations 

All  corporations  having  a  place  of  business  in  states  other 
than  that  in  which  they  are  incorporated  are  required  to  con- 
form to  the  local  laws  regulating  foreign  corporations.  These 
laws  usually  require  a  license  to  do  business — for  which  pay- 
ment must  be  made — and  the  payment  thereafter  of  an  annual 
tax.  In  some  states  the  tax  imposed  on  foreign  corporations 
is  so  onerous  that  it  is  economy  to  organize  a  small  local  sub- 
company  to  conduct  the  operations  necessary  in  such  states. 

The  taxes  imposed  on  foreign  corporations  are  usually  on 
the  same  basis  as  those  imposed  on  domestic  corporations,  but 
in  most  states  the  franchise  or  equivalent  tax  is  imposed  only 
on  the  proportion  of  capital  stock  actually  employed  in  state. 

§  20.     (8)  Federal  Taxes 

The  federal  taxes  which  affect  corporations  are  imposed 
under  the  Revenue  Acts  of  September  8,  19 16  and  March  3, 
19 1 7,  and  are  known  as  the  Corporation  Income  Tax,  the 
Capital  Stock  Tax,  Excess  Profits  Tax,  and  Estate  Tax.^ 

The  Corporation  Income  Tax  is  a  tax  of  2  per  cent  upon 
the  entire  net  income  received  by  the  corporation  from  all 
sources  during  the  year,  and  extended  rules  and  regulations 
have  been  issued  by  the  government  directing  how  "net  in- 
come" is  to  be  ascertained.  The  Income  Tax  reports  must  be 
filed  on  or  before  March  i  and  the  tax  must  be  paid  on  or 
before  June  15  in  each  year,  unless  the  corporation's  fiscal 


'  As  this  book  goes  to  press  there  is  before  Congress  for  passage  a  war  revenue  bill 
which  will  radically  change  the  existing  revenue  laws.  If  passed  in  its  present  form 
two  changes  will  be  made  affecting  corporations:  (i)  the  Corporation  Income  Tax  will 
be  increased  by  an  additional  income  tax  of  2  per  cent;  and  (2)  the  law  imposing  the 
Excess  Profits  Tax  will  be  repealed  and  a  tax  will  be  imposed  on  excess  profits  earned 
by  corporations  whose  profits  have  increased  since  the  pre-war  years  of  191 1,  1912,  and 
1913;  in  other  words,  on  "war  profits," 


20  THE   CORPORATE   FORM 

year  differs  from  the  calendar  year,  in  which  case  the  dates 
for  filing  the  report  and  for  payment  of  the  tax  are  adjusted. 

The  Capital  Stock  Tax  is  imposed  only  upon  corporations 
having  a  capital  stock  of  the  fair  average  value  for  the  pre- 
ceding year  in  excess  of  $99,000,  and  is  a  tax  of  1/20  of  i  per 
cent  upon  such  excess.  Reports  are  due  and  the  tax  payable 
in  July  of  each  year. 

The  Excess  Profits  Tax  is  a  tax  of  8  per  cent  upon  the 
amount  by  which  the  net  income  of  the  corporation  exceeds 
the  sum  of  (a)  $5,000  and  (b)  8  per  cent  of  the  actual  capital 
invested.  The  tax  is  computed  upon  the  basis  of  the  net 
income  shown  by  the  corporation  income  tax  reports  and  is 
payable  at  the  same  time  as  the  income  tax. 

The  Estate  Tax  is  an  inheritance  tax.  Corporate  stock, 
like  all  other  forms  of  property,  is  subject  to  the  tax,  but  the 
law  imposes  no  duty  upon  the  corporation  or  transfer  agent 
to  collect  the  tax  or  see  that  the  same  is  paid  before  trans- 
ferring stock  upon  the  corporate  books. 

Reports 
§21.     (i)   Local  Tax  Reports;  (2)  State  Tax  Reports 

Local  tax  reports,  made  in  connection  with  the  usual 
property  taxes,  are  similar  to  those  of  individuals. 

A  state  tax  report  or  reports  are  required  of  corporations, 
primarily  for  purposes  of  taxation,  but  beyond  this  to  supply 
a  record  of  the  officers  and  directors  of  the  corporation  and 
such  other 'data  as  may  be  deemed  necessary. 

§  22.     (3)   Federal  Tax  Reports 

The  income  tax  report  is  simple  to  prepare  under  a  well- 
arranged,  modern  accounting  system,  but  otherwise  it  is  diffi- 
cult and  troublesome.  The  report  must  be  filed  on  or  before 
March  i  and  covers  the  calendar  year  ending  December  31 
preceding,  unless  the  corporation  designates  the  last  day  of 


DISADVANTAGES  21 

any  other  month  as  the  closing  of  its  fiscal  year  and  gives 
proper  notice  to  the  collector.  In  such  case  the  report  will 
cover  the  fiscal  year  so  designated  and  the  dates  for  filing  the 
report  and  for  payment  of  the  tax  will  be  adjusted  accord- 
ingly. For  the  purposes  of  the  Excess  Profits  Tax,  all  cor- 
porations having  a  net  income  of  $5,000  or  more  for  the  tax- 
able year  must  include  in  their  income  tax  reports  a  detailed 
statement  of  the  actual  capital  invested. 

Although  no  corporation  having  a  capital  stock  of  the 
value  of  $99,000  or  less  is  liable  for  the  Capital  Stock  Tax, 
the  government  regulations  require  that  reports  be  filed  by 
every  corporation  having  a  capital  stock  of  the  value  of 
$75,000  and  over.  The  report  must  be  filed  in  July  of  each 
year  and  covers  the  preceding  twelve  months. 

Failure  or  refusal  to  file  either  of  these  reports  within  the 
time  required  by  law,  or  the  filing  of  a  false  or  fraudulent 
return,  renders  the  corporation  liable  to  a  severe  penalty  and 
an  additional  tax  to  be  added  to  the  assessment. 

§  23.     (4)   Annual  Reports 

In  addition  to  the  tax  report,  many  states  require  the  filing 
of  another  report,  usually  in  January  of  each  year  or  other- 
wise at  some  specified  time  after  the  annual  meeting,  giving 
the  names  and  addresses  of  the  corporate  officers  and  directors, 
and  the  location  of  the  principal  office  in  the  state.  The 
report  is  usually  simple  and  is  a  reasonable  requirement, 
as  parties  having  claims  against  the  corporation  or  desiring 
to  institute  actions  against  it  should  have  reliable  information 
as  to  who  the  officers  are  and  where  they  can  be  found. 

§  24.     (5)  Reports  of  Foreign  Corporations 

The  corporation  is  usually  required  to  make  reports  In 
each  state  in  which  it  does  business.  These  reports  are  in 
most  states  similar  to  those  of  domestic  corporations. 


Part  II — Pre-Incorporation  Considerations 


CHAPTER    III 

SUBSCRIPTION    LISTS    AND    CONTRACTS 

§  25.     General 

In  former  days  the  subscription  list  was  regarded  as  a 
necessary  preliminary  to  incorporation.  It  was  circulated  to 
determine  whether  sufficient  support  could  be  obtained  to 
justify  the  proposed  incorporation,  or,  if  this  were  already 
known,  to  commit  the  subscribers  definitely  before  the  organi- 
zation was  actually  undertaken. 

In  the  present  day  the  application  of  the  corporate  form 
has  been  extended  and  somewhat  modified,  and  the  procedure 
attendant  upon  organization  has  changed  correspondingly. 
Now  the  corporation  is  usually  organized  first,  property  of 
some  kind  is  taken  over,  and  stock  is  then  sold  or  subscriptions 
solicited  to  raise  any  needed  capital.  Under  this  plan  the  sub- 
scription list  is  of  much  less  prominence  and  importance  than 
formerly. 

There  are,  however,  still  many  cases  of  incorporation  in 
which  the  preliminary  subscription  is  employed  and  is,  at 
times,  essential.  The  farmers  of  a  neighborhood  may  wish 
to  establish  a  creamery  or  a  fruit-evaporating  plant;  in  some 
growing  town  the  citizens  may  wish  to  combine  their  efforts 
for  the  construction  of  an  electric  plant,  the  organization  of  a 
bank,  the  opening  of  a  library,  or  the  establishment  of  some 
local  industry.    In  such  event,  the  subscription  list  is  circulated 

22 


SUBSCRIPTION   LISTS    AND   CONTRACTS  23 

as  the  first  step  toward  the  formation  of  the  contemplated 
corporation.  Also  in  other  cases,  memoranda  or  agreements, 
which  are  the  equivalent  of  the  subscription  list,  are  entered 
into  between  the  parties  interested,  and  these  are  the  prelimi- 
nary and  definite  steps  towards  the  intended  corporate  or- 
ganization. (See  Chapter  LXIV,  "Forms  of  Subscription 
Lists.") 

§  26.     Nature  of  the  Subscription  Contract 

Prior  to  the  organization  of  the  corporation,  the  ordinary- 
subscription  is  merely  a  continuing  proposition  from  the  sub- 
scriber to  the  proposed  corporation  for  the  purchase  of  a  speci- 
fied amount  of  stock.  At  this  stage  the  subscription  is  not 
a  complete  and  enforceable  contract  because  the  other  party 
thereto — the  proposed  corporation — has  no  legal  existence, 
and,  until  the  corporation  is  formed,  the  death,  insanity,  or  vol- 
untary withdrawal  of  the  subscriber  would  cancel  the  proposi- 
tion and  thereby  terminate  the  proposed  contract.^ 

After  the  corporation  is  organized  and,  by  either  express 
or  implied  acceptance  of  the  subscriptions  to  its  stock,  has 
completed  the  contract,  the  subscription  list  becomes  a  bind- 
ing agreement  between  the  parties  thereto,  and  the  corporation 
may,  if  necessary,  bring  suit  for  specific  enforcement.^ 

To  avoid  this  possibility  of  revocation  which  is  characteris- 
tic of  the  ordinary  subscription  list  before  its  acceptance  by  the 
corporation,  subscriptions  are  frequently  made  payable  to 
trustees,  who  act  for  the  corporation  in  the  matter,  undertak- 
ing its  organization,  and  where  desirable  the  collection  of  the 
subscriptions  in  whole  or  in  part.  Under  such  a  contract 
properly  drawn,  the  subscriptions,  if  unconditional,  are  binding 


1  Hudson  R.  E.  Co.  v.  Tower,  156  Mass,  82  (1892);  s.  c,  161  Mass.  lo  (1894); 
Planters,  etc.,  Packet  Co.  v.  Webb,  156  Ala.  551  (1908);  Vermilion  Sugar  Co.  v. 
Vallee,  134  La.  661  (1914);  Wright  Bros.  v.  Merchants  &  Planters  Packet  Co.,  104 
Miss.    507    (1913). 

2  10  Cyc,  pp.  388,  389,  394,  n.  571;  I  Cook  on  Corp.,  §§71,  7^,  75;  Nebraska  Chicory 
Co.  V.  Lednicky,  1131  N.  W.  Rep.  (Neb.)  245  (1907);  Snodgrass  v.  Zander  &  Co., 
106  Ark.  462   (1913). 


24  PRE-INCORPORATION    CONSIDERATIONS 

as  soon  as  made;  if  conditional,  as  soon  as  the  conditions  are 
fulfilled.' 

The  acceptance  of  a  valid  subscription  by  the  corporation 
not  only  renders  the  contract  a  binding  one  but  also,  of  itself, 
constitutes  the  subscriber  a  stockholder  of  the  corporation.  If 
his  subscription  is  made  to  a  trustee  for  the  corporation,  he 
becomes  a  stockholder  as  soon  as  the  corporation  is  organized 
and  his  subscription  turned  in  by  the  trustee.  In  either  case 
nothing  further  is  necessary  to  establish  him  legally  in  this 
position  nor  in  the  enjoyment  of  his  rights  as  a  stockholder. 
The  delivery  of  the  stock  certificates,  while  a  formal  recogni- 
tion of  this  status,  confers  nothing  that  he  did  not  have  before, 
being  simply  a  convenient  evidence  of  his  stock  interest. 
"These  cases  in  one  court  in  which  the  subscriber  to  capital 
stock  has  been  treated  as  a  stockholder  are  cases  in  which  the 
contract  between  him  and  the  corporation  showed  that  he  was 
a  stockholder  having  complied  with  the  terms  of  his  subscrip- 
tion and  all  that  was  required  upon  his  behalf  was  a  certificate 
evidencing  the  same."^  Even  though  the  subscriber  never  pays 
his  subscription,  he  is  a  stockholder  from  the  time  of  the 
acceptance  of  his  subscription  until  such  time  as  by  proper 
procedure  his  subscription  is  cancelled  or  forfeited  for  non- 
compliance with  its  conditions.^ 

On  the  other  hand,  it  is  to  be  noted  that  the  corporation 
when  organized  is  under  no  compulsion  to  accept  or  recognize 
the  ordinary  subscription  to  its  stock.  The  subscriber  is  not 
bound;  neither  is  the  corporation  until  the  contract  is  com- 
pleted as  to  both  parties  by  the  acceptance  of  the  subscription 
by  the  corporation.^  If  the  subscription  is  made  to  a  trustee 
for  the  corporation  and  is  accepted  by  him,  this  would  make  a 


'  West  V.  Crawford,  80  Gal.  ig  (1889) ;  Richelieu  Hotel  Co.  v.  Encampment  Co., 
140  111.   248  (1892);   Horseshoe  Pier,   etc.,   Co.  v.   Sibley,   157  Cal.  442  (1910). 

*  Kruse   v.    Brewing   Co.,    79   N.    J.    Eq.    392    (1911). 

^2  Clark  &  Marshall,  §§366,  ^ySh,  and  cases  cited;  Beals  v.  Buffalo  Con- 
struction Co.,  4g  App.  Div.   (N.  Y.)  589   (1900). 

^  Starrett  v.  Rockland  Ins.  Co.,  65  Me.  -»74  (1876);  Hudson  R.  R.  Co.  v.  Tower, 
161  Mass.   10  (1894);  s.  c,  156  Mass.  82  (1892);  Mill  Co.  v.  Felt,  87  Me.  234.  (1895). 


SUBSCRIPTION   LISTS    AND    CONTRACTS 


25 


binding  contract  between  the  subscriber  and  the  trustee,  but 
would  not  bind  the  corporation  until  its  acceptance  of  the 
subscription,  express  or  implied.  If  the  corporation  accepted 
the  benefit  of  the  trustee's  act,  it  would  thereby  also  accept  the 
trustee's  contracts,  from  which  such  benefits  accrued.  The 
very  fact  of  the  organization  of  the  corporation  by  the  trustee, 
or  trustees,  might  be  held  to  be  an  acceptance  of  the  subscrip- 
tion contracts  which  rendered  such  incorporation  possible. 

Usually,  however,  the  acceptance  of  subscriptions  by  the 
corporation  does  not  enter  into  consideration,  such  acceptance 
following  its  organization  as  a  matter  of  course.  Litigation 
may  be  necessary  to  compel  payment  of  subscriptions,  but 
not  usually  to  compel  their  acceptance  by  the  corporation. 

In  New  York,  contrary  to  the  weight  of  authority  else- 
where, the  courts  do  not  treat  an  original  subscription  to  stock 
in  a  corporation  thereafter  to  be  formed  as  a  continuing  offer, 
but  hold  that,  to  be  enforceable,  it  must  contain  all  of  the 
elements  of  a  valid  contract  at  the  time  it  is  made.  Con- 
sequently they  will  not  enforce  a  simple  subscription  for  stock 
in  a  corporation  thereafter  to  be  formed,  but  lay  down  the  rule 
that,  to  be  enforceable,  such  subscription  must  amount  to  an 
agreement  between  two  or  more  parties  to  form  the  corpora- 
tion and  to  take  stock  therein,  and  that  only  after  its  formation 
by  such  parties,  or  by  some  one  authorized  to  act  for  them  in 
this  regard,  can  the  subscription  to  stock  be  enforced  by  the 
corporation  when  formed.^ 

Subscriptions  made  as  part  of  a  prescribed  statutory  form 
of  incorporation  are  irrevocable  as  soon  as  made.^  This  applies 
to  a  certificate  of  incorporation  wherein  the  parties  executing 
it  appear  as  subscribers  to  designated  shares  of  stock.  It  also 
applies  to  subscriptions  made  on  books  or  lists  opened  by  com- 


TAvon  Springs  Sanatarium  v.  Weed,  189  N.  Y.  557  (1907);  Sanders  v.  Bumaby, 
166  App.    Div.    (N.    Y.)    27A,   (1915)- 

S2  Clark  &  Marshall  on  Corp.,  8  4Sie;  i  Machen  on  Corp.,  §242;  Dupee  v. 
Horse  Shoe  Co.,  117  Fed.  40  (1902);  Stevens  v.  Episcopal  Church  History  Co.,  140 
App.   Div.    (N.   Y.)    570  (1910). 


26  PRE-INCORPORATION   CONSIDERATIONS 

missioners  where  this  is  part  of  a  prescribed  statutory  form 
of  incorporation. 

It  has  been  held  in  some  cases  that  where  a  statutory  form 
has  been  prescribed  for  taking  subscriptions,  those  taken  in 
any  other  form  are  not  binding.^  This  does  not  seem  reason- 
able, and  there  is  good  authority  for  the  contrary  view/" 

After  the  completion  of  any  subscription  agreement  by  the 
proper  action  of  both  parties  thereto,  it  becomes  a  simple  con- 
tract and  subject  to  the  usual  laws  of  contracts. 

The  subscription  to  stock  must  be  distinguished  from  an 
agreement  to  purchase  stock."  In  the  first  instance  the  sub- 
scriber becomes  a  stockholder  immediately  upon  the  acceptance 
of  his  subscription  by  the  corporation.  In  the  latter  case  he 
does  not  become  a  stockholder  until  the  consummation  of  his 
agreement  and  the  delivery  to  him  of  his  certificates  of  stock. 
A  subscription  list  might  be  so  worded  as  to  be  merely  an 
agreement  to  purchase  stock,  in  which  case  the  subscribers 
would  not  be  stockholders  until  they  received  their  certificates 
of  stock.     (See  §  2'j.') 

§  27.     Form  of  Subscription  Contract 

Generally,  the  form  of  the  subscription  list  is  of  small  im- 
portance if  the  intent  of  the  parties  is  clearly  expressed.  Ex- 
cept for  the  difficulty  of  proof,  a  verbal  subscription,  if  within 
the  provisions  of  the  statute  of  frauds,  would  be  binding  and 
entirely  sufficient. ^^ 

As  a  matter  of  ordinary  precaution,  however,  the  subscrip- 
tion list  should  be  prepared  with  due  regard  to  form  and  with 
a  clear  presentation  of  all  important  details.  The  name  of 
the  proposed  corporation,  its  general  purpose,  its  capitalization, 

» Poughkeepsie,  etc.,  Co.  v.  Griffin,  24  N.  Y.  150  (1861) ;  Shelby  Co.  Ry.  Co,  v. 
Crow,   137  Mo.    App.   461    (1009).     See  Meachem   on   Corp.,    §  200. 

"10  Cyc,  p.  392,  n.  42;  Planters,  etc.,  Co.  v.  Webb,  144  Ala.  666  (1905);  Buffalo  & 
Jamestown   R.    R.    Co.   v.   Giflford,  87  N.   Y.   294'  (1882). 

"  Morawetz  on  Corp.,  §  61 ;  2  Clark  &  Marshall,  §3*2;  Wood  Harvester  Co. 
V.  Jefferson,  71    Minn.  367  (189S)  ;   Palais  du  Costume  v.   Beach,  143.  S.   W.  Bsa  (1912). 

"i  Cook  on  Corp.,  §53;  Rutenbeck  v.  Hohn,  143  Iowa  13  (1909);  Peninsula 
Leasing  Co.   v.   Cody,   161   Mich.   604   (1910). 


SUBSCRIPTION   LISTS   AND   CONTRACTS  27 

the  par  value  of  shares,  the  state  in  which  it  is  to  be  incorpo- 
rated, and  the  conditions  under  which  the  subscription  is  made, 
all  should  be  set  forth  with  precision.  Enough  should  be  in- 
cluded to  prevent  any  question  as  to  the  nature  of  the  sub- 
scription and  the  conditions  under  which  it  was  made. 

It  is  entirely  possible  to  draw  a  subscription  paper  so 
loosely  that  the  subscribers  cannot  be  bound  when  the  corpora- 
tion is  formed  and  attempts  to  accept  their  subscriptions. 
This  is  so,  for  instance,  when  there  is  nothing  in  the  sub- 
scription agreement  to  connect  the  corporation  formed  with 
the  corporation  contemplated  by  the  subscription  agreement. 
A  subscription  agreement  should  identify  the  proposed  cor- 
poration with  reasonable  clearness,  and  should  either  name  the 
person  or  persons  who  are  to  form  the  corporation,  or  be  in  its 
terms  an  agreement  between  the  persons  signing  it  to  organize 
such  a  corporation.  In  this  case  the  corporation  should  be 
organized  by  the  persons  named.  If  A,  B,  and  C  sign  a  mere 
subscription  to  a  corporation  to  be  formed,  and  afterward  E, 
F,  and  G,  who  are  not  mentioned  in  the  subscription  paper 
organize  such  a  corporation,  there  is  no  necessary  connection 
between  the  parties,  and  the  newly  organized  corporation  can- 
not by  merely  accepting  the  subscriptions  of  A,  B,  and  C  bind 
them.^' 

In  Massachusetts,  Maine,  and  New  Hampshire  the  sub- 
scription contract  must  contain  an  express  agreement  to  pay. 
If  such  a  promise  is  not  contained  in  the  agreement,  the  only 
remedy  is  forfeiture  of  the  subscriber's  stock  for  non-pay- 
ment.^* 

Where  it  is  inconvenient  to  go  into  full  details  of  the  cor- 
poration and  the  terms  of  subscription  in  the  subscription 


"Woods  Motor  Vehicle  Co.  v.  Bradj',  i8t  N.  Y.  145  (1905);  Avon  Springs  Co. 
V.  Weed,  119  A.  D.  560  (1907);  rev,,  189  N.  Y.  557  (1907);  Sanders  v.  B-urnaby,  166 
App.    Div.    (N.    Y.)    2714    (1915). 

"New  Haven  Horse  Nail  Co.  v.  Linden  Spring  Co.,  14J2  Mass.  349,  354  (1886); 
Belfast,  etc..  Railroad  Co.  v.  Cottrell,  66  Maine  185  (1876);  White  Mts.  Railroad  v. 
Eastman,  34  N.    H.   124,   147   (1856). 


28  PRE-INCORPORATION   CONSIDERATIONS 

list  proper,  a  general  statement  or  prospectus  is  frequently- 
prepared  and  accompanies  the  list.  Where  this  is  done  the 
statements  of  this  prospectus  become  a  part  of  the  represen- 
tations upon  which  the  subscriptions  are  secured,  and  must  be 
lived  up  to  in  all  essential  details  if  the  subscription  is  to  be 
held.^^ 

Any  material  variation  from  the  statements  of  the  sub- 
scription list,  such  as  a  change  of  capital,  or  purposes,  or  lo- 
cation, will  release  the  subscribers/^  For  this  reason,  only 
those  details  should  be  stated  explicitly  in  the  subscription  list 
that  have  been  fully  decided  upon,  any  undecided  points  being 
either  omitted,  or  stated  as  undecided,  or  otherwise  so  covered 
that  no  matter  how  they  are  finally  settled  the  subscriptions 
previously  secured  will  not  be  affected.  For  instance,  if  the 
name  of  the  proposed  corporation  has  not  been  finally  deter- 
mined, the  list  may  be  headed  with  any  suggested  name,  as 
"The  Arnold  Separator  Company,"  while  the  body  of  the 
document  states  that  the  subscriptions  are  made  to  the  stock 
"of  a  corporation  to  be  organized  under  the  name  of  *The 
Arnold  Separator  Company,'  or  such  other  name  as  may  be 
later  determined."  Or  if  the  capitalization  were  not  definitely 
settled  the  subscription  list  might  fix  sufficiently  elastic  limits 
by  the  use  of  such  phrases  as  "not  less"  or  "not  to  exceed,"  ac- 
cording to  the  conditions.  Subscribers  to  such  a  list  could  not 
plead  any  voidance  of  their  subscriptions  no  matter  what 
name  or  what  capitalization,  within  the  limits,  was  eventually 
selected. 

At  times  individual  subscription  blanks  are  sent  out  in- 
stead of  a  single  list.  At  other  times  several  similar  lists  are 
circulated  as  a  matter  of  convenience.     If  properly  worded  to 


"  Southern  Insurance  Co.  v.  Milligan,  154  Ky.  216  (19131) ;  Lehman-Charley  v. 
Bartlett,    13.5  App.    Div.    (N.    Y.)   674   (1909);  attd.,   202   N.   Y.    524   (1911). 

^«  r  Cook  on  Corp.,  §  54;  2  Cook  on  Corp.,  §  502;  Woods  Motor  Vehicle  Co.  v. 
Brady.  181  N.  Y.  145  (1905);  Yonkers  Gazette  Co.  v.  Taylor,  30  A.  D.  (N.  Y.)  334 
(1898) ;  Clarksburg  Board  of  Trade  v.  Davis,  86  S.  E.  (W.  Va.)  929  (1915) ;  Midland  City 
llotel  Co.   V.   Gibson,   11   Ga.   App.  829  (1912). 


SUBSCRIPTION   LISTS    AND    CONTRACTS  29 

show  their  common  purpose,  these  separate  Hsts  will  for  all 
legal  purposes  be  held  as  a  single  list. 

The  subscription  list  should  be  clearly  and  unmistakably  a 
subscription  and  not  an  agreement  to  subscribe  in  the  future  or 
to  purchase  stock  later.  As  a  general  rule  the  courts  construe 
subscription  agreements  very  liberally  in  accordance  with  what 
appears  to  be  the  intent  of  the  parties,  but  a  direct  statement 
that  "We,  the  undersigned,  hereby  agree  to  subscribe,  etc.,"  in- 
stead of  the  proper  form,  "We,  the  undersigned,  hereby  sub- 
scribe, etc.,"  might  have  a  very  different  legal  effect  from  that 
intended."  An  agreement  beginning  "We,  the  undersigned, 
severally  promise  and  agree  to  and  with  each  other  that  we 
will  associate  ourselves  into  a  corporation,  etc."  was  held  good 
in  Massachusetts.^* 

It  is  to  be  noted  that  under  the  common  law,  unless  other- 
wise specified  in  the  agreement  of  subscription,  the  entire  capi- 
tal stock  of  the  proposed  corporation  must  be  subscribed  before 
any  of  the  subscriptions  are  binding  and  enforceable.^^  In  some 
of  the  states  this  has  been  modified  by  statute,  but  unless 
this  has  been  done  the  rule  prevails,  and,  where  it  is  desirable 
that  subscriptions  for  a  less  amount  than  the  entire  capital 
stock  shall  hold,  the  subscription  list  should  so  specify.  It 
is  competent  for  the  subscription  list  to  fix  this  amount  at  any 
desired  figure  and  the  subscriptions  will  be  binding,  provided 
the  other  requisite  conditions  are  fulfilled,  so  soon  as  the 
specified  amount  is  secured. 

Any  person  competent  to  contract  may  make  a  binding 
subscription  for  stock.  A  subscriber  for  stock  need  not  neces- 
sarily be  an  incorporator  of  the  company,  though  usually,  as 
a  matter  of  statutory  requirement,  an  incorporator  must  be  a 
subscriber  to  the  company's  stock.     One  corporation  cannot 


"General  Electric  Co.  v.  Wightman,  3  App.  Div.  (N.  Y.)  118  (1896);  Palais  du 
Costume   Co.    v.    Beach,    14.^   S.    W.   852    (1912). 

isAthol  Music  Hall  Co.   v.   Carey,   116  Mass.  4711    (18751). 

'»  I  Cook  on  Corp.,  §§176-181;  Converse  v.  Gardner  Governor  Co.,  174  Fed.  30 
(1905);    Myers   v.    Sturgis,    123  App.    Div.    (N.    Y.)    470    (1908). 


30 


PRE-INCORPORATION   CONSIDERATIONS 


usually  subscribe  for  the  stock  of  another  corporation,  though 
it  might  be  permissible  in  the  case  of  a  corporation  authorized 
to  hold  the  stock  of  other  corporations. 

§  28.     Underwriting  Agreements 

In  the  organization  of  the  larger  corporations,  and  more 
especially  those  designed  to  effect  industrial  combinations,  it 
is  usually  very  important  and  at  times  absolutely  essential 
that  funds  be  raised  in  advance  of  the  time  when  the  corpo- 
rate securities  can  be  offered  for  sale,  or  that  there  be  some 
positive  assurance  that  the  necessary  funds  will  be  derived 
from  the  sale  of  these  securities  when  they  are  ready  to  be 
offered..  Under  such  conditions  the  use  of  the  ordinary  sub- 
scription agreement  would,  at  the  best,  be  ineffective  and  in 
most  cases  absolutely  impracticable.  Recourse  is  then  had  to 
the  modified  form  of  subscription  agreement  known  as  the 
underwriting  agreement.     (  See  §419.) 


CHAPTER    IV 

CONTRACTS    PRIOR    TO    INCORPORATION 

§  29.     Status  of  Corporation  upon  Organization 

When  a  corporation  comes  into  existence  it  is  usually 
without  debts,  contracts,  or  obligations  of  any  kind,  save  those 
expressed  in  its  charter  and  in  the  statute  law  of  the  state  of 
domicile.  It  is  not  bound  by  anything  done  or  said  before 
its  incorporation  unless  embodied  in  its  charter.  A  cor- 
poration cannot  be  bound  before  it  exists,  as  no  one  could  then 
act  with  authority  as  its  agent  or  representative.^    (See  §  34.) 

After  its  organization,  the  corporation  may  recognize  or 
accept  any  proffered  contracts  it  sees  fit,  and  this  applies  to 
contracts  made  on  its  account  before  its  incorporation.  Its  ac- 
ceptance of  such  a  contract  may  be  expressed  or  implied.  If 
the  corporation  takes  the  benefit  of  the  contract,  it  is  liable 
thereon  without  any  express  recognition  or  formal  acceptance.^ 
For  example,  if  offices  had  been  leased  for  the  corporation  be- 
fore its  incorporation  and  the  corporation,  when  organized, 
occupied  the  offices,  it  would  be  liable  on  the  contract  without 
further  acceptance.  If  the  corporation  did  not  occupy  the 
offices  but  by  a  proper  resolution  recognized  the  contract  and 
assumed  the  rent,  it  would  be  liable.  If  it  neither  occupied  the 
offices  nor  assumed  the  lease,  there  would  be  no  acceptance 
either  express  or  implied  and  the  corporation  could  not  be  held. 
The  whole  matter  rests  in  its  discretion.^ 

In  Massachusetts  and  in  Missouri  the  courts  hold  that  a 


^See  3  Cook  on  Corp.,   §7107;  Oakes  v.  Water  Co.,   143  N.  Y.  430  (1894);  Federal 

etc.,  Co.  V.  Loeb,  147  App.  Div.  (N.  Y.)  7^7  (igii). 

2  Robins  v.    Ry.    Co.,    100  Me.   496  (1905);   In  re   Ballou,   215:  Fed.   810  (1914)- 

8  Bond  V.   Atlantic   Terra   Gotta   Co.,    137  A.    D.    (N.    Y.)   671    (1910) ;    Sheator  Tel. 

Co.  V.  Tel.  Co.,  217  111.  577  (19051) ;  Whitney  v.   Wyman,   loi   U.  S.  39a  (1879);  Martin 

V.   Remington-Martin  Co.,  95  A.  D.   (N.   Y.)   iS  (1904). 

31 


32  PRE-INCORPORATION   CONSIDERATIONS 

corporation  cannot,  by  adoption  or  otherwise,  ratify  a  contract 
made  when  it  was  not  in  existence  by  one  who  assumed  to  act 
as  its  agent.  It  may,  if  its  directors  see  fit,  make  a  new  contract 
on  the  same  terms,  but  this  is  a  new  contract  and  must  be  com- 
plete as  a  contract  in  itself/  A  contract  made  prior  to  the  in- 
corporation might  amount  to  an  offer  to  the  corporation  which 
it  could  accept/ 

§  30.     Status  of  Contracting  Parties 

Contracts  are  continually  entered  into  by  incorporators, 
promoters,  or  trustees  for  and  on  account  of  unorganized  cor- 
porations. These  contracts  are  entered  into  on  behalf  of  the 
corporation  and  in  its  interests,  but  the  party  who  enters  into 
any  such  contract  is  himself  liable  in  the  absence  of  an  express 
agreement  to  the  contrary  until  the  assumption  of  the  contract 
by  the  corporation.^  Then,  if  it  w^as  understood  that  he  was 
acting  in  the  interests  of  the  corporation,  the  party  directly 
contracting  is  relieved  of  liability,  the  corporation  taking  over 
the  liability  in  his  stead.  If,  however,  there  were  no  such 
understanding  the  party  who  originally  made  the  contract 
would  be  responsible,  even  after  the  contract  was  taken  over  by 
the  corporation.^ 

For  example,  if  offices  are  leased  for  the  use  of  a  corpora- 
tion about  to  be  formed,  with  the  clear  understanding  that 
the  party  making  the  lease  is  acting  for  the  unorganized  corpo- 
ration, such  party  is  personally  liable  and,  if  the  corporation 
fails  to  assume  the  lease,  can  be  held  for  the  full  amount,  but 
so  soon  as  the  contract  is  assumed  by  the  new  corporation 
•he  is  released.  If,  however,  the  lease  were  taken  without  a 
clear  understanding  that  the  party  was  acting  for  the  cor- 


*  Pennell  v.  Lothrop,  191  Mass.  35.7  (lqo6^ ;  Whitine  &  Sons  Co.  v.  Barton, 
204   Mass.    169   C1910);    Van  Noy  v.    Insurance   Co.,    168  Mo.    App.    287    (19113). 

®  Holyoke   Env.    Co.   v.    U.    S.   Envelope   Co.,   182  Mass.    171    (1902). 

•i    Machen   on    Corp..    §358,   ei  seq. 

'  Case  Mfg.  Co.  v.  Soxman,  138  U.  S.  431-437  (1891) ;  Bradshaw  v.  Jones,  152 
S.  W.   (Tex.)  69s  (1912) ;  Strause  v.  Richmond  Woodworking  Co.,  109  Va.  724  (1909). 


CONTRACTS   PRIOR  TO   INCORPORATION  33' 

poration,  he  would  not  be  relieved  by  the  mere  fact  that  the 
corporation  took  over  the  lease,  but  would  still  be  liable  and, 
should  the  corporation  fail  to  pay  its  rent,  might  be  called 
upon  to  make  good  the  deficiency. 

For  this  reason,  in  making  contracts  for  the  benefit  of  an 
unorganized  corporation,  the  fact  that  they  are  being  made  for 
such  proposed  corporation  should  be  clearly  recognized  and 
expressed.  The  parties  making  such  contracts  should  also 
recognize  their  own  liability  in  the  matter,  and,  if  there  is  any 
uncertainty  as  to  the  ultimate  organization  of  the  corporation 
or  its  acceptance  of  the  contracts,  should  make  them  depend- 
ent upon  the  organization  of  the  corporation  and  its  accept- 
ance of  the  contracts,  or  otherwise  be  prepared  to  assume  the 
responsibility  themselves.^ 

§31.    Agreements  Among  Incorporators 

There  is  another  class  of  agreements  relating  to  the 
unorganized  corporation  of  a  very  different  nature.  These 
are  the  understandings  or  agreements  among  the  incorpora- 
tors or  other  interested  parties  which  define  the  nature  of  the 
proposed  corporation,  its  purposes,  and  often  the  details  of  its 
organization  and  management.  Among  the  parties  these 
agreements  are  perfectly  proper  and  legitimate,  but  they  affect 
the  corporation  only  so  far  as  they  are  incorporated  in  its 
charter  or  by-laws  when  these  are  drawn. 

It  is  to  be  borne  in  mind  that  provisions  may  be  incor- 
porated in  the  charter  or  made  part  of  the  by-laws  in  pur- 
suance of  a  contract  or  as  a  consideration  for  a  contract,  in 
such  wise  that  their  subsequent  alteration  or  repeal  can  be 
effected  only  by  consent  of  the  interested  parties.  One  partner 
may  agree  to  the  incorporation  of  the  partnership  business 
on  condition  that  certain  provisions  be  embodied  in  the  by- 
laws, the  maintenance  and  observance  of  such  provisions  con- 


8 1  Machen  on  Corp.,  §  361. 


34  PRE-INCORPORATION   CONSIDERATIONS 

stituting  part  of  the  consideration  for  the  transfer  of  the  part- 
nership property.  Such  by-law  provisions,  properly  incor- 
porated and  duly  adopted,  cannot  be  revoked  without  the 
consent  of  all  parties  concerned.^  No  by-law  can  be  repealed 
so  as  to  violate  or  impair  a  vested  right.^" 

Often  agreements  in  regard  to  incorporation  are  mere 
verbal  understandings.  Usually,  if  not  carried  out,  these  only 
result  in  the  refusal  of  the  aggrieved  party  to  move  further  in 
the  matter,  such  agreements  not  ordinarily  furnishing  sufficient 
basis  for  litigation. 

Even  formal  agreements  between  promoters  as  to  the 
subject  matter  of  a  charter  can  rarely  be  specifically  enforced, 
and  the  only  recourse  of  the  aggrieved  party  is  a  refusal  to 
participate  in  the  subsequent  organization  of  the  corporation, 
or,  if  damages  can  be  shown,  to  bring  a  suit  against  the  offend- 
ing parties  for  their  breach  of  contract." 

§32.    Promoters'  Contracts 

The  general  doctrine  that  no  one  is  authorized  to  contract 
for  a  corporation  before  it  is  formed  applies  to  all  contracts 
with  and  by  promoters.  The  promoter  is  himself  liable  on 
these  precorporate  contracts,  unless  otherwise  expressly  pro- 
vided, but  the  corporation  is  not.^^ 

For  example,  as  is  frequently  the  case,  the  promoters  of 
an  enterprise  may  agree  with  an  attorney  for  its  incorporation, 
authorizing  him  to  attend  to  the  whole  matter,  including  dis- 
bursements, preparation  of  seal,  printing,  etc. ;  the  amount  of 
his  professional  fee  being  agreed  upon  in  advance.  On  the 
organization  of  the  corporation,  its  directors  might,  if  they 
saw  fit,  disclaim  the  whole  matter  and  the  attorney  would 


•Kent  V.  Quicksilver,  etc.,  Co.,  78  N.  Y.  159;  Lowenthal  v.  Rubber,  etc.,  Co.,  52 


N.   T.    Eq.  440. 

">  Wright   V.    Knights    of   the   Maccabees,    196   N.    Y.    391    (1909). 

"  Machen  on   Corp.,    §410;    Rudiger  v.    Coleman,   iia  A.    D.    (N.   Y. 

^'  Bank   v.    Church    Federation,    129   Iowa   268   (1906) ;    Munson   v,    Syracuse,    etc., 
R.   R.   Co.   103   N.   Y.   S9  (i886);   Bond  v.   Atlantic  Terra  Gotta  Co.   137.  N.   Y.   App. 


CONTRACTS   PRIOR  TO   INCORPORATION  35 

have  neither  recourse  nor  claim  against  the  corporation  on 
account  of  his  contract  with  the  promoters.  The  corporation 
having  utilized  his  legal  services  in  its  incorporation  would 
probably  be  held  for  a  fair  fee,  and  for  the  necessary  disburse- 
ments, such  as  the  state  fee,  notarial  charges,  filing  fees,  etc. 
But  such  claims  would  have  to  be  based  on  their  own  merits, 
not  on  the  terms  of  the  agreement  made  with  the  promoters. 
That  agreement  would  have  no  standing  as  against  the  cor- 
poration, and  should  this  latter  reject  the  seal,  printing,  etc., 
the  attorney  would  have  no  ground  to  proceed  against  the 
corporation  therefor,  but  must  look* to  the  promoters.^^ 

'  The  most  difficult  question  arising  under  contracts  with 
promoters  relates  to  the  sale  of  property  to  the  corporation. 
It  is  a  matter  of  almost  daily  occurrence  for  promoters  to  dis- 
pose of  property  to  corporations  organized  by  them  for  the 
express  purpose  of  taking  over  such  property.  This  some- 
what complicated  subject  is  discussed  in  detail  in  a  later 
chapter.  (See  Chapter  LIV,  "Concerning  Promoters,"  also 
§§238,246,434.) 

§33.     Option  Contracts 

In  the  formation  of  corporations,  and  especially  in  the 
formation  of  combinations,  it  is  frequently  necessary  that  op- 
tions be  secured  in  advance  of  the  actual  incorporation.  As 
these  options  may  be,  and  often  are,  absolutely  essential  to 
the  enterprise,  they  must  be  secured  before  the  corporation  is 
formed  and  frequently  involve  very  considerable  expenditures 
of  money. 

Notwithstanding  the  importance  of  these  contracts  and 
their  peculiar  nature,  they  fall  under  the  general  rulea  gov- 
erning precorporate  contracts.  If  accepted,  they  become  the 
contract  of  the  corporation;  if  rejected,  the  corporation  cannot 


^^Re  Empress  Engineering  Co.,  L.  R.  i6,  Ch.  D.,  125  (1881O ;  Weatherford  Ry, 
Co.  V.  Granger,  86  Texas  350  (1894);  Taussig  v.  St.  Louis,  etc.,  Ry.  166  Mo.  28 
(1901);    Bank   v.    Eckels,    191    Pa.   3.7a   (1899)- 


36  PRE-INCORPORATION   CONSIDERATIONS 

be  held.  If  the  corporation  refuses  to  take  over  any  such 
option  contracts,  the  party  obtaining  or  holding  them  would 
have  no  claim  for  compensation  or  for  damages  on  account  of 
any  payments  made  by  him  thereon  or  in  connection  therewith. 
He  might  have  some  claim  against  his  associates  if  they  made 
any  promises  to  him  in  regard  to  the  options  or  authorized 
him  to  procure  them,  but  the  corporation  could  not  be  in- 
volved except  by  its  voluntary  consent.  (  See  Chapter  LXIX, 
''Option  Agreements.") 

§  34.     Trustees'  Contracts 

When  the  organization  of  a  corporation  Is  contemplated, 
not  infrequently  a  trustee,  or  trustees,  will  be  selected  to  act 
for  the  inchoate  corporation.  Some  arrangement  of  the  kind 
is  necessary  where  subscriptions  to  the  stock  of  the  corporation 
are  to  be  made  binding  before  its  organization.  Also  it  is 
usually  advisable  to  have  definite  parties  in  charge  of  the 
matter  who  have  power  to  act  for  the  subscribers  and  who  will 
attend  to  the  details  of  the  incorporation. 

Such  trustees  frequently  collect  payments  on  subscrip- 
tions, make  disbursements  in  the  interest  of  the  new  enter- 
prise, and  in  some  cases  actually  carry  on  the  undertaking  un- 
til such  time  as  the  corporation  may  be  advantageously  organ- 
ized and  put  in  control  of  the  going  concern. 

No  matter  how  far  such  trustees  may  have  carried  the 
corporate  affairs  nor  to  what  extent  they  may  have  contracted 
in  the  interests  of  the  corporation,  they  have  the  same  in- 
dividual liability  on  these  contracts  and  the  same  inability  to 
force  them  on  the  corporation,  as  in  the  case  of  any  other 
precorporate  contracts. 

The  coign  of  vantage  occupied  by  the  trustees  is  found 
in  the  fact  that  they  are  in  control  of  the  organization,  and 
where,  on  behalf  of  the  corporation,  contracts  of  any  impor- 


CONTRACTS    PRIOR   TO    INCORPORATION  37 

tance  have  been  entered  into,  or  disbursements  have  been  made, 
or  obligations  have  been  incurred  by  them,  they  will  see  that 
these  are  properly  assumed  by  the  corporation  before  its  con- 
trol passes  from  their  hands.  Then,  if  these  contracts  have 
been  entered  into  in  proper  form  so  that  the  assumption  by 
the  corporation  releases  the  trustees,  these  latter,  barring 
fraud,  are  thereafter  absolutely  free  from  any  liability  on  ac- 
count of  their  precorporate  undertakings.     (See  §  30.) 

§  35.     Effect  of  Failure  to  Incorporate 

When  contracts  are  entered  into  in  expectation  of  the 
formation  of  a  corporation  and  on  its  behalf,  the  trustees' 
status  if  the  corporation  fails  of  incorporation  depends  upon 
the  nature  and  condition  of  the  contract.  A  subscription  to  its 
stock,  no  matter  how  irrevocable,  would  be  terminated;  if 
payments  had  been  made  thereon  to  a  trustee,  any  unexpended 
amount  might  be  reclaimed;  and  if  the  trustee  were  to  blame 
for  the  failure  to  incorporate,  he  might  be  responsible  for 
the  portion  expended  as  well.  Other  contracts,  if  clearly 
made  on  behalf  of  the  proposed  corporation,  would  in  most 
cases  be  terminated.  If  not  clearly  so  made,  the  parties  acting 
for  the  corporation  might  be  held  to  specific  performance  or 
for  damages  for  non-performance.  If  the  contracts  were 
made  with  the  distinct  understanding  that  they  were  for  the 
benefit  of  the  proposed  corporation,  the  parties  acting  for  the 
unorganized  corporation  could  not  insist  on  performance  for 
their  own  benefit. 

Subscribers  may  under  some  circumstances  be  held  liable 
as  partners  for  expenses  incurred  if  the  attempted  incor- 
poration is  not  effected.  Thus  where  a  projected  incorporation 
failed  the  court  said:  "Under  the  facts  disclosed  in  this  case, 
the  corporation  had  no  existence;  there  was  simply  an  im- 
matured  intention  of  the  parties  to  form  a  corporation 
.     .     .     .     there  being  no  responsible  principal,  the  associated 


38  PRE-INCORPORATION    CONSIDERATIONS 

parties  must  be  held  liable  as  partners."^*  In  Illinois,  Missis- 
sippi, and  some  other  states  the  statutes  provide  that  the 
incorporator  shall  be  held  personally  liable  where  the  incor- 
poration is  incomplete. ^^ 


"Furniture,  etc.,  Co.  v.  Crawford,  127  Mo.  356  (1894);  Meyer  v.  Brunson,  88 
S.    E.    (S.    C.)   3,59   (i9t6);    Bank   v.    Sheldon,   86  Kan.   460    (1912). 

■^■^  Ragland  v.  Doolittle,  100  Miss.  498  (1911);  Richardson  Fueling  Co.  v.  Seymour 
2J5  111.  3J9  (i9o«). 


CHAPTER   V 
WHERE    TO    INCORPORATE 

§36.     General 

If  the  corporation  laws  and  taxes  were  uniform  in  every 
state  of  the  Union,  or  if  the  whole  matter  were  regulated  by 
general  federal  laws,  the  best  location  for  any  particular 
corporation  could  easily  be  determined.  It  would  then,  as 
a  matter  of  course,  be  organized  in  that  state  in  which  the 
principal  operations  were  to  be  carried  on  or  in  which  its 
headquarters  might  most  conveniently  be  located. 

There  is,  however,  great  variation  in  the  cost  of  incor- 
poration in  different  states,  also  in  the  rates  and  methods  of 
taxation  after  incorporation.  The  general  requirements  and 
regulations  imposed  on  corporate  operations  also  differ  widely. 

Owing  to  the  material  differences  in  the  costs,  regulations, 
and  requirements  of  the  several  state  laws,  taken  in  connection 
with  the  fact  that  a  corporation  organized  in  one  state  may, 
under  the  restrictions  imposed  on  foreign  corporations  by 
other  states,  do  business  in  these  states,  the  selection  of  the 
place  of  incorporation  frequently  becomes  a  balancing  of  the 
comparative  advantages  and  disadvantages  of  the  available 
states.  The  low  taxes  of  one  state  will  be  weighed  against 
the  better  corporation  laws  of  another ;  the  liabilities  incurred 
in  a  convenient  state  with  the  freedom  therefrom  in  another 
less  convenient  state;  the  benefit  of  incorporation  under  desir- 
able laws  in  an  "outside'*  state  and  consequent  burdens  in 
the  "operating"  state,  as  against  direct  incorporation  in  this 
latter;  or  the  privileges  allowed  by  one  state  as  against  the 
immunities  enjoyed  under  the  laws  of  another. 

39 


40 


PRE-INCORPORATION   CONSIDERATIONS 


§  37.     Domestic  Incorporation 

Within  the  boundaries  of  the  state  by  which  it  is  chartered; 
a  corporation  is  a  domestic  corporation ;  outside  these  bound- 
aries it  is  a  foreign  corporation.  Within  its  own  state  a  cor- 
poration has  certain  recognized  powers  and  privileges  as  a 
matter  of  right ;  outside  it  has  only  such  powers  and  rights  as 
may  be  accorded  foreign  corporations  by  the  laws  or  customs 
of  the  particular  state.  These  regulations  as  to  foreign  cor- 
porations vary  greatly  in  the  different  states.  In  some,  foreign 
corporations  are  discriminated  against,  while  in  others,  upon 
compliance  with  the  prescribed  formalities  foreign  corpora- 
tions have  the  same  status  as  domestic  corporations. 

As  a  rule  a  corporation  should  be  organized  in  that  state 
in  which  its  principal  operations  are  to  be  carried  on,  and  this 
rule  should  not  be  departed  from  unless  to  gain  some  distinct 
advantage.  At  times,  however,  there  may  be  weighty  reasons 
for  incorporating  in  an  outside  state.  Also  it  often  happens 
that  the  business  of  a  corporation  must  be  conducted  in  a 
number  of  different  states,  in  which  case  it  is  domiciled  in 
one  state  and  thereafter  transacts  its  business  in  the  others  as  a 
foreign  corporation.  The  selection  of  the  home  state  then 
becomes  purely  a  question  of  expediency.     (See  §§  143,  144.) 

§  38.     Foreign  Incorporation 

A  corporation  is  not  a  citizen  of  the  United  States  and 
has  no  claims  to  the  privileges  and  immunities  of  citizenship 
under  the  Constitution.^  It  is  an  artificial  creation  of  the 
state  in  which  it  is  incorporated,  and  in  that  state  is  endowed 
by  common  and  statute  law  with  certain  rights,  powers,  and 
immunities.  It  is  also  usually  allowed  to  carry  on  its  oper- 
ations in  other  states,  with  all  the  powers  and  privileges  it  en- 
joys in  its  home  state.^    These  other  states  may,  however,  if 


ipaul    V.    Virgrinia,    8  Wall.    i68    (1868). 

*  Dodge  V,    City,   57  Iowa  560  (1881) ;   Tootle  v.    Singer,    1.18  Iowa  53A   536   (1902): 
Lancaster  v.   Amsterdam  Improvement  Co.,   140  N.  Y.  576  (1894). 


WHERE  TO   INCORPORATE 


41 


they  so  desire,  ignore  the  fictitious  personaHty  of  the  foreign 
corporation,  refuse  it  recognition,  debar  it  from  initiating  liti- 
gation in  the  state  courts,  consider  it  a  partnership  if  litigation 
be  brought  against  it,  or  even  entirely  prohibit  its  corporate 
operations  within  the  state  except  in  so  far  as  they  may  be 
permitted  by  the  constitutional  provisions  regulating  interstate 
commerce.^ 

Generally,  however,  no  such  discrimination  is  exercised 
against  the  foreign  corporation.  In  most,  if  not  all  the  states, 
laws  will  be  found  providing  for  certain  fees  and  other  re- 
quirements as  a  prerequisite  to  the  exercise  of  the  corporate 
rights  by  foreign  corporations  within  the  state,  but  upon 
compliance  with  these  demands  they  are  admitted  freely  and 
are  usually  accorded  all  the  rights  and  privileges  of  domestic 
corporations. 

Some  states  have  even  favored  "the  stranger  within  the 
gates,''  as  in  New  York,  where  for  many  years  domestic  cor- 
porations were  subjected  to  high  fees,  burdensome  reports, 
and  possible  liabilities,  which  were  not  imposed  upon  foreign 
corporations  doing  business  within  the  state.  As  a  conse- 
quence the  citizens  of  New  York  when  desirous  of  incor- 
porating a  local  business  or  enterprise  would  resort  to  other 
states  for  the  purpose,  and  the  corporation  so  organized  would 
thereafter  do  business  in  New  York  as  a  foreign  corporation, 
and  this  though  all  the  parties  interested  resided  in  the  state 
and  all  the  corporate  business  was  transacted  there. 

This  practice  gave  rise  to  litigation  to  determine  the 
right  of  citizens  to  incorporate  elsewhere  when  the  corporate 
business  was  to  be  conducted  in  the  state,  but  the  decisions 
were  uniformly  and  unreservedly  in  favor  of  such  right.* 
In  other  states  the  same  question  has  arisen  and  has  been  so 


82  Morawetz  on  Corp.,  S^^Sa;  Ducat  v.  Chicago.  10  Wall.  410-  (1870);  Pembina 
Mining  Co.  v.  Pa.,  1125  U.  S.  181  (188S) ;  Pensacola  Tel.  Co.  v.  W.  U.  Tel  Co.,  96 
U.    S.    I    (1877). 

*  Merrick  v.  Van  Santvoord,  34  N.  Y.  207  (1866);  Demarest  v.  Flack,  128  N.  Y. 
aoj   (189:);   Lancaster  v.   A.    I.   Co.,   MO  N.   Y.   576   (1894). 


42  PRE-INCORPORATION   CONSIDERATIONS 

uniformly  decided  in  the  same  way  that  the  principle  may 
be  regarded  as  firmly  established.^ 

In  some  states  conditions  of  so  onerous  a  nature  exist  as 
to  render  foreign  incorporations  most  desirable,  as  for  instance 
the  double  liability  of  Minnesota,  which  is  imposed  upon  the 
stockholders  of  certain  corporations  when  organized  under  the 
laws  of  the  state.  Under  ordinary  conditions  the  stockholders 
of  a  foreign  corporation  doing  business  in  the  state  escape 
this  double  liability  altogether,  being  subject  only  to  such 
liabilities  as  are  imposed  by  the  corporation  laws  of  the 
state  of  organization.® 

In  this  connection  it  is  to  be  noted  that  the  State  of  Cali- 
fornia, in  which  a  special  liability  is  imposed  upon  stockholders 
of  domestic  corporations,  has  sought  to  extend  this  same 
liability  by  statute  provision  to  the  stockholders  of  foreign 
corporations  doing  business  within  the  state.  This  liability 
has  been  sustained  in  two  decrees  of  the  Supreme  Court  of  the 
United  States,  in  one  instance  as  against  the  California  stock- 
holders of  a  Colorado  corporation  doing  business  in  Cali- 
fornia, and  in  the  second  case  as  against  a  New  York  stock- 
holder of  an  Arizona  corporation  doing  business  in  California. 
In  the  first  case,  however,  the  corporation  was  organized  in 
Colorado,  mainly  by  citizens  of  California,  for  the  express 
purpose  of  doing  business  in  California,  and  this  purpose, 
with  unusual  and  perhaps  unnecessary  frankness,  was  specifi- 
cally set  forth  in  the  charter.^ 

In  the  second  case  the  charter  recited  that  the  corporation 
was  formed  to  carry  on  business  in  Arizona  and  California, 
and  the  defendant  prior  to  the  incorporation  had  signed  a 
writing  reciting  the  intent  of  the  subscribers  to  form  a  cor- 


"  People  V.   Fidelity  Co.,  15.3  111.  25  (1894):   Haskins  v.   Kelly,  Tj^  Kans.   155  (1908); 
Saltmarsh   v.    Spaulding,    147    Mass,    224    (1888) ;    Newburg   Petroleum    Co.    v.    Weare, 


T]   O.   St.   343   (1S75) 

8  Bank   v.    Hall,  35   O. 
U.  S.  5271  (1883) ;  Risdon  I.  &  L.   Works  v.   Furness,  (1906)   i  K.  B.  49. 


8  Bank   v.    Hall,  35   O.    St.    158    (1878);    Canada   Southern   R.    Co.    v.    Gebhard,    109 
S.  5271  (1883) ;  Risdon  I.  &  L.   Works  v.   Fv 
^  Pinney  v.    Nelson,   183  U.   S.   144  (1901). 


WHERE  TO   INCORPORATE  43 

poration  in  Arizona  for  the  purpose  of  acquiring  land  in  Cali- 
fornia and  locating  a  hotel  thereon.  While  not  questioning 
the  principle  that  the  corporation  could  not  without  authority 
from  the  stockholder  make  him  answerable  in  a  way  not  con- 
templated by  the  charter,  the  court  in  the  latter  case  held  that, 
on  the  facts,  the  stockholder  had  assented  to  the  doing  of 
business  in  California  and  was  therefore  bound. ^ 

It  may  be  stated  as  a  general  rule  that  if  corporate  busi- 
ness of  any  importance  is  to  be  carried  on  in  a  foreign  state 
all  the  requirements  of  that  state  in  regard  to  foreign  cor- 
porations should  be  complied  with  as  a  matter  of  business 
policy  and  expediency.  In  some  states  severe  fines  are  im- 
posed on  corporations  doing  business  without  a  license,  though 
the  usual  penalty  is  the  refusal  of  corporate  recognition  by 
the  foreign  state.  The  corporation  may,  however,  still  carry 
on  business  within  such  foreign  state,  its  property  is  safe  from 
confiscation,  and  it  cannot  be  prevented  from  bringing  suit  in 
all  proper  cases  in  the  United  States  courts  in  that  state. 
Beyond  this,  however,  it  has  no  status.  It  cannot  enforce  a 
contract  or  collect  a  debt  in  the  state  courts.  Where,  however, 
as  in  Michigan,  Missouri,  and  several  other  states,  the  statutes 
declare  all  contracts  made  by  unauthorized  foreign  corpora- 
tions to  be  void,  no  action  is  maintainable  upon  such  contracts 
even  in  the  federal  courts.^  In  Florida  it  has  been  held  that, 
if  sued,  an  unauthorized  foreign  corporation  may  be  treated 
as  a  partnership  and  its  stockholders  be  considered  as  part- 
ners.'*^ 

In  addition  to  the  restrictions  and  penalties  imposed  upon 
unauthorized  corporations,  as  corporations,  many  states  make 
the  officers  and  agents  acting  for  the  corporation  within  the 
state  liable  to  heavy  penalties,  and  five  of  the  western  states 


*  Thomas  v.   Matthiessen,  232  U.   S.  221   (i9i4)- 

»Despres,    Bridges    &    Noel    v.    Zierleyn,    163    Mich.    399    (1910) ;    Parke    Davis    & 
Co.,  V.   Muller,  245  Mo.   168  (191a). 

^"Taylor    v.    Branham,    35    Fla.    297    (18951). 


44 


PRE-INCORPORATION   CONSIDERATIONS 


make  the  officers  and  agents  of  the  corporation  jointly  and 
severally  liable  in  any  and  all  contracts  of  such  corporation 
made  within  the  state  during  the  time  that  the  corporation  was 
in  default. 

§  39.     Cheap  Incorporation 

Resort  to  outside  incorporation  on  account  of  its  cheapness 
is  legitimate  but  not  always  wise.  The  cheap  states  have 
their  advantages,  but  the  excellence  of  their  corporate  regu- 
lations does  not  figure  among  these.  Nor  is  the  status  of 
their  incorporations  as  a  class  entirely  desirable  for  reputable 
organizations. 

Occasions  will  occur  when  temporary  or  experimental  in- 
corporations are  desirable,  or  where  the  conditions  are  such 
that  the  cheapest  incorporation  must  be  made  to  serve,  or 
where  the  laxity  of  corporate  regulation  is  regarded  as  ad- 
vantageous.   Then  the  cheap  location  will  be  sought. 

Speaking  generally,  however,  the  ease  and  cheapness  with 
which  incorporation  may  be  secured  in  these  localities  draw 
to  them  the  unsubstantial  enterprises,  illusive  undertakings, 
and  fraudulent  schemes  that  so  frequently  adopt  the  cor- 
porate guise  for  their  dubious  careers.  These,  flocking  to 
the  cheaper  states,  give  bad  repute  to  their  incorporations,  and 
the  very  fact  of  organization  in  one  of  these  states  is  a  cir- 
cumstance requiring  explanation  and  tending  to  prejudice  the 
experienced  investor.  In  other  words,  the  corporation  is  in 
bad  company  and  is  likely  to  suffer  the  usual  results  of  such 
association. 

An  even  more  material  objection  to  the  states  of  cheap 
incorporation  is  found  in  the  fact  that  their  corporation 
laws  are  crude,  incomplete,  and  for  the  most  part  unad- 
judicated.  Nor  is  there  any  reasonable  assurance  of  the 
permanency  of  the  existing  laws.  Obviously  they  have  been 
compiled  hastily  and  without  requisite  care  and  consideration, 


WHERE  TO    INCORPORATE  ^^ 

and  they  are  liable  to  be  amended  or  altered  at  any  time  with 
equal  haste  and  lack  of  judgment.  The  possibilities  in  this 
direction  are  illustrated  by  the  corporate  career  of  West  Vir- 
ginia. Prior  to  1901,  West  Virginia  had  a  virtual  monopoly 
of  the  cheap  incorporation  business.  Its  rates  were  low  and 
its  requirements  simple.  Incorporations  flowed  to  it  in  a 
steady  stream  and  its  revenue  therefrom  was  large  and  very 
profitable.  In  1901,  however,  without  previous  warning  and 
without  obvious  reasons  beyond  an  ill-judged  avarice,  the 
state  legislature  raised  the  corporate  fees  and  taxes  materially 
and  made  them  complicated  as  well  as  burdensome.  The  re- 
sult was  the  practical  destruction  of  the  incorporating  business 
in  West  Virginia.  Most  of  the  outside  corporations  already 
in  the  state  re-incorporated  elsewhere,  new  incorporations 
ceased  to  come,  and  West  Virginia  is  no  longer  considered 
an  available  resort  for  incorporators  from  other  states. 

§  40.     Reputation  of  Different  States 

Each  of  the  incorporating  states  has  a  general  reputation 
in  corporate  matters.  This  primarily  arises  from  the  character 
and  operation  of  its  corporate  legislation  and  from  the  security 
afforded  thereby  to  corporate  investors  and  creditors,  but 
is  directly  derived  from  the  character  of  the  corporations  or- 
ganized under  its  laws. 

This  reputation  is  of  much  importance  to  corporations  in- 
tending to  offer  their  securities  to  intelligent  investors.  In  the 
cheaper  localities,  on  account  of  this  cheapness  and  the  accom- 
panying laxity  of  the  corporate  laws,  such  reputation  is  dis- 
tinctly bad.  The  mere  fact  that  a  corporation  is  organized  in 
Arizona  or  South  Dakota  is  sufficient  to  put  experienced  in- 
vestors on  their  guard  and  renders  the  sale  of  corporate  securi- 
ties difficult. 

Among  the  more  moderate-priced  incorporating  states 
Maine  stands  well  and  is  resorted  to  by  many  eastern  corpo- 


^5  PRE-INCORPORATION   CONSIDERATIONS 

rations.  Delaware  has  a  fair  reputation  and,  with  its  moder- 
ate organization  fees  and  annual  taxes,  is  a  popular  state  for 
outside  incorporations.  Connecticut's  reputation  is  good,  but 
is  not  widely  known. 

New  Jersey  was  at  one  time  the  most  popular  state  in  the 
Union  for  outside  incorporations  of  large  capitalization,  but 
in  191 3  the  legislature  passed  certain  laws  affecting  corpora- 
tions known  as  the  "Seven  Sisters"  Acts,  which  prohibited 
holding  corporations,  and  otherwise  made  restrictions  which 
greatly  hampered  New  Jersey's  business  of  incorporation. 
New  Jersey  felt  the  change  severely  and  has  recently  re- 
stored to  good  standing  the  holding  corporation  and  the 
subsidiary  company.  These  are  now  lawful  provided  their 
effect  is  not  to  "substantially  lessen  competition,"  or  to  "re- 
strain trade,"  or  to  "create  a  monopoly."  Massachusetts 
stands  high,  on  account  of  the  conservatism  of  her  laws. 
Pennsylvania  is  greatly  handicapped  by  the  complications  of 
her  corporation  laws,  but  stands  well,  as  do  also  Illinois  and 
other  important  states  lying  between.  New  York,  under  its 
present  corporation  laws,  rank  high. 

§  41.     Liabilities  Imposed  in  Different  States 

When  the  selection  of  a  state  for  incorporation  is  under 
consideration  the  special  liabilities  attaching  to  directors  and 
stockholders  of  a  corporation  are  matters  for  careful  investi- 
gation. The  unusual  stock  liabilities  found  in  Minnesota  and 
California  are  very  serious,  if  not  insuperable,  objections  to 
incorporation  in  these  states.  In  the  cheap  localities  the  usual 
liability  on  unpaid  stock  exists,  but  there  are  no  special  liabili- 
ties of  either  directors  or  stockholders. 

In  the  more  important  incorporating  states  stockholders 
generally  have  no  liabilities  save  on  unpaid  stock,  though  in 
Massachusetts,  New  York,  and  a  few  other  states  there  is  a 
stockholders'  liability  to  laborers  employed  by  the  corporation. 


WHERE  TO   INCORPORATE 


47 


Also  in  Idaho,  Minnesota,  and  some  other  states  failure  to 
observe  certain  requirements  as  to  corporate  organization  and 
procedure  may  involve  stockholders  in  liability ;  and  in  a  num- 
ber of  states  the  legislatures  have  re-enacted  the  common  law 
liability  of  stockholders — which  exists  in  all  states — for  divi- 
dends or  other  disbursements  to  the  stockholders  which  im- 
pair the  capital  stock. 

In  most  of  the  states  directors  are  held  liable  only  for 
negligence  or  direct  fraud. 

§  42.     Protection  of  Minority  in  Different  States 

The  protection  of  minority  interests  is  at  times  of  very 
great  importance.  It  could  hardly  be  satisfactorily  secured  in 
any  state  where  special  charter  provisions  are  not  permitted, 
though  in  some  states  where  such  provisions  are  not  allowed, 
the  right  to  cumulative  voting  is  effectually  secured  by  the 
constitution  or  the  statutes  of  the  state,  and  the  minority  is 
to  that  extent  protected.  In  Delaware,  New  Jersey,  and  New 
York  protection  may  be  secured  by  charter  provisions.  In 
Maine  it  may  be  had  only  by  by-law  enactment,  which,  as 
the  by-laws  are  subject  to  repeal  by  the  majority,  is  practically 
no  protection.     (See  Chapter  LV,  ^'Protection  of  Minority.") 

§  43.     General  Rules  for  Selection  of  State 

Usually  the  selection  of  the  place  of  incorporation  will  be 
determined  by  the  particular  conditions.  The  more  important 
of  the  few  general  rules  that  can  be  given  are  as  follows: 

1.  A  corporation  having  but  one  plant  or  place  of  busi- 
ness, in  which  all  or  the  greater  part  of  its  capital  is  involved, 
should  be  incorporated  in  the  state  where  that  plant  or  place 
of  business  is  located. 

2.  Any  large  corporation,  or  industrial  combination, 
formed  to  transact  business  or  operate  plants  in  a  number  of 


48 


PRE-INCORPORATION   CONSIDERATIONS 


states  will,  for  the  reasons  already  given,  find  incorporation 
in  Delaware  advantageous  while  Maine  also  is  favored  for  in- 
corporations of  this  kind. 

3.  Temporary  incorporations,  some  few  close  corporations, 
purely  speculative  corporations,  incorporations  of  doubtful 
stability,  and  all  other  corporations  desiring  the  maximum 
of  capitalization  with  the  minimum  of  expense  and  restriction, 
will  naturally  gravitate  to  the  bargain-counter  localities  where 
the  cost  of  incorporation  is  nominal. 


CHAPTER   VI 

COST  OF  INCORPORATION 

§  44.     General 

The  direct  expenses  of  incorporation  are  the  initial  organ- 
ization taxes  paid  the  state  authorities,  the  incidental  fees 
for  filing  and  acknowledgments,  fees  paid  to  counsel,  and  the 
cost  of  the  corporate  equipment.  Thereafter  the  expenses 
are  presumably  the  same  as  for  an  unincorporated  concern, 
save  for  the  annual  franchise  tax  and  possibly  an  increased 
property  taxation  that  may  result  from  the  greater  difficulty 
of  evasion  under  the  corporate  form. 

The  incidental  fees  are  usually  trifling.  The  initial  state 
fees  and  the  subsequent  annual  taxation  are  more  serious. 
As,  however,  these  differ  greatly  in  the  various  states,  only  a 
general  consideration  of  the  subject  can  be  undertaken  here. 

§  45.     Organization  Fees  and  Annual  Taxes 

In  deciding  upon  a  locality  for  incorporation  the  matter 
of  fees  and  taxes  should  not  be  given  undue  importance.  In 
many  cases  really  important  advantages  are  sacrificed  for  the 
sake  of  immaterial  savings  in  fees.  Unless  the  saving  is  con- 
siderable, it  is  rarely  expedient  to  incorporate  in  a  foreign 
state  for  this  reason  alone.  The  following  tables  give  the 
states  most  utilized  for  general  incorporation  purposes. 

It  is  to  be  noted  that  all  such  tables  of  comparative  ex- 
penses are  misleading  without  some  explanation.  For  in- 
stance, the  annual  taxes  of  the  preceding  table  are  based  on  the 
supposition  that  in  each  case  the  entire  stock  of  the  corpora- 
tion is  issued  and  outstanding.    Also  the  annual  taxes  as  given 

49 


50 


PRE-INCORPORATION   CONSIDERATIONS 


Comparative  Table  of  Organization  Expenses 

Including  Taxes  and  All  Filing  and  Incidental  Fees 


Capital  Stock 
of  Company 

New  Jersey 

New  York 

Delaware 

Maine 

South 
Dakota 

$1,000 

$35.00 

$40.00 

$25.00 

$27.00 

$13.00 

5,000 

3500 

40.00 

25.00 

27.00 

13.00 

10,000 

35.00 

40.00 

25.00 

27.00 

13.00 

2S,ooo 

3500 

42.50 

25.00 

67.00 

1300 

So,ooo 

35.00 

55.00 

25.00 

67.00 

18.00 

100,000 

35.00 

80.00 

25.00 

67.00 

18.00 

500,000 

110.00 

280.00 

65.00 

67.00 

23.00 

1,000,000 

210.00 

530.00 

115.00 

117.00 

33.00 

5,000,000 

1,010.00 

2,530.00 

365.00 

517.00 

113.00 

10,000,000 

2,010.00 

5,030.00 

615.00 

1,017.00 

153.00 

Comparative  Table  of  Annual  Franchise  Taxes 

$1,000 

$1.00 

$1.50 

$5.00 

$5.00 

None 

5,000 

5.00 

750 

5.00 

5.00 

10,000 

10.00 

15.00 

5.00 

5.00 

25,000 

25.00 

37.50 

500 

5.00 

50,000 

50.00 

75.00 

10.00 

5.00 

100,000 

100.00 

150.00 

10.00 

10.00 

500,000 

500.00 

750.00 

25.00 

50.00 

1,000,000 

1,000.00 

1,500.00 

50.0G 

75.00 

5,000,000 

4,000.00 

7,500.00 

150.CQ 

27500 

10,000,000 

4,250.00 

15,000.00 

275.00 

525.00 

are  exclusive  of  the  usual  tax  imposed  on  any  real  or  personal 
property  held  in  the  state,  which  is  taxed  in  all  respects  as 
if  owned  by  an  individual.  In  New  York  the  annual  tax 
varies  with  the  conditions,  and,  as  given  in  the  table,  is  based 
on  the  supposition  that  (i)  all  the  capital  is  issued,  (2)  is 
used  in  the  state,  and  (3)  is  paying  6  per  cent  dividends.^ 

In  the  table  as  given  the  usual  incidental  expenses  of 
each  state  have  been  included  as  part  of  the  organization 
tax.    These  incidental  fees  vary.     In  New  York  they  amount 


^  Since  this  was  written  New  York  has  imposed  on  mercantile  and  manufacturing 
corporations  a  3  per  cent  income  tax  in  lieu  of  the  tax  as  given. 


COST   OF   INCORPORATION  5I 

approximately  to  $15;  in  New  Jersey  $10;  in  Delaware  $15; 
in  Maine  $17;  in  South  Dakota  $3.  In  Arizona  these  fees 
would  amount  to  from  $20  to  $30. 

The  comparative  cost  of  incorporation  comes  up  for 
consideration  only  when  foreign  incorporation  is  contemplated. 
In  all  such  cases  the  cost  of  keeping  up  a  state  office  and 
agent  in  the  selected  state  is  to  be  added  to  the  usual  expenses. 
This  would  vary  from  $25  to  $50  annually  for  corporations 
of  moderate  capitalization,  and  usually  includes  assistance  in 
holding  annual  meetings  in  the  state  and  such  attention  to 
state  reports  as  is  demanded  by  the  local  law. 

It  is  to  be  noted  that  the  annual  franchise  tax  in  New 
Jersey  amounts  to  a  very  considerable  sum.  In  New  York 
a  corporation  doing  all  its  business  outside  of  the  state 
and  merely  maintaining  an  office  in  the  state  for  its  books 
and  meetings,  pays  no  annual  franchise  tax.  The  annual 
franchise  tax  in  Maine  and  in  Delaware  is  moderate.  In  the 
District  of  Columbia,  IlHnois,  North  and  South  Dakota,  and 
some  other  of  the  western  states  there  is  no  annual  franchise 
taxation.  Connecticut  and  Wisconsin  have  no  franchise  tax 
but  have  an  income  tax  which  applies  to  the  income  of  cor- 
porations. In  considering  the  question  of  cost,  it  is  to  be 
remembered  that  foreign  corporations  are  usually  required 
to  pay  license  fees  and  taxes  in  the  states  in  which  they  do 
business,  and  often  foreign  incorporation  merely  adds  the 
cost  of  the  outside  incorporation  to  the  taxes  that  cannot 
be  avoided  in  the  state  in  which  the  corporation  conducts  its 
operations.  In  some  cases,  however,  a  foreign  incorporation 
may  save  onerous  local  taxation,  as  in  the  case  of  People,  etc. 
V.  Feitner,  54  App.  Div.  (N.  Y.)  217  (1906),  where  debts 
due  the  company  from  parties  outside  the  state  were  held 
taxable  in  the  state,  as  was  also  personal  property  generally 
regardless  of  its  situs.  Here  foreign  incorporation  would  have 
saved  the  corporation  over  $30,000  per  annum. 


52  PRE-INCORPORATION   CONSIDERATIONS 

§46.     Avoiding  Fees  and  Taxation 

As  stated  elsewhere,  it  is  usually  advisable  for  an  incor- 
poration to  be  taken  out  in  that  state  where  the  principal 
business  is  to  be  conducted.  At  times,  however,  the  incor- 
porating fees  are  so  excessive  that  the  corporation  is  forced 
to  resort  to  another  state  where  the  fees  are  less  onerous, 
doing  business  in  its  own  state  thereafter  as  a  foreign  cor- 
poration. For  instance,  had  the  Steel  Trust  incorporated  in 
Pennsylvania,  which  would  naturally  have  been  its  home 
state,  its  initial  fees  would  have  amounted  to  over  $3,500,000. 
In  the  state  selected.  New  Jersey,  these  fees  amounted  to 
but  $220,000. 

Incorporation  in  a  less  expensive  state  is  the  most  obvious 
method  of  avoiding  excessive  state  fees,  where  practicable. 
Conditions  may  exist,  however,  which  fix  the  state  of  incor- 
poration despite  the  question  of  fees,  and,  where  the  fees  are 
high,  the  details  of  incorporation  should  then  be  so  adjusted 
as  to  reduce  these  fees  and  the  annual  taxation  thereafter  to 
the  lowest  possible  figure. 

Where  a  corporation  is  organized  to  take  over  a  business 
or  property,  it  is  often  possible  and  frequently  distinctly  advan- 
tageous to  issue  bonds  in  part  payment  for  the  property  taken 
over.  The  necessary  capital  stock  of  the  company  is  thereby 
reduced  by  just  the  amount  of  this  bond  issue,  and  the  state 
fees  and  the  state  taxation  thereafter  are  also  proportionately 
less.  Also,  in  many  states  the  corporation,  in  rendering  its 
statement  of  taxable  property,  is  allowed  to  deduct  any  out- 
standing indebtedness.  The  bond  issue  is  an  entirely  legit- 
imate indebtedness  and  in  these  states  may  be  deducted  from 
the  taxable  property  of  the  corporation  in  ascertaining  the 
basis  of  taxation.  This  law  was  sustained  by  the  decision  in 
People,  etc.  v.  Barker,  139  N.  Y.  55  (1894),  an  extreme 
case,  where  the  corporation  under  consideration  had  an  out- 
standing bond  issue  of  $2,256,000,  an  amount  far  in  excess 


COST   OF   INCORPORATION 


53 


of  its  total  capital  stock,  and  at  least  twice  the  amount  of  its 
actual  assets.     In  this  decision  the  court  said  (at  p.  63): 

"This  indebtedness  must  in  the  nature  of  things  be  taken 
into  consideration  in  arriving  at  the  value  of  the  capital  of 
the  relator.  And  when  it  is  seen  that  the  indebtedness  of  a 
corporation  is  double  the  amount  of  all  its  assets,  it  follows, 
upon  the  system  adopted  by  the  State  for  the  assessment  of 
corporations  that  the  actual  value  of  the  capital  of  such  a 
corporation  is  zero." 

In  some  states  a  corporation  is  taxed  on  personal  property 
in  the  place  where  its  principal  place  of  business  is  located,  and 
this  place  of  business  is  fixed  by  its  charter.  This  obtains  in 
the  state  of  New  York.  Accordingly,  the  Union  Steamboat 
Company,  operating  principally  in  Buffalo,  New  York,  where 
it  employed  twenty  steam  propellers  and  conducted  a  profitable 
business,  selected  by  charter  designation  an  obscure  little  ham- 
let in  the  southern  part  of  the  state  as  its  principal  place  of 
business.  Here  taxation  was  low  and  assessors  lenient  and 
the  company  made  good  the  statement  of  its  charter  by  renting 
a  room,  putting  up  its  sign  thereon,  and  holding  its  annual 
meeting  therein. 

This  went  on  without  objection  for  some  six  years,  when 
the  Buffalo  assessors  woke  to  the  fact  that  the  city  was  not 
receiving  its  apparent  dues,  and  thereupon  promptly  assessed 
the  corporation  on  some  $600,000  of  personal  property.  The 
company  paid  the  tax  under  protest  and  then  brought  suit  to 
recover  the  amount  so  paid.  Judgment  was  in  favor  of  the 
corporation  and  on  appeal  to  the  highest  court  was  sustained. 
The  court  in  its  decision^  stated  that  if  the  scheme  was  a  device 
to  avoid  taxation  the  evil  must  be  corrected  by  other  authori- 
ties, not  by  the  courts. 

It  was  to  be  supposed  that  the  legislature  would,  in  accord- 
ance with  the  suggestion  of  the  court,  have  promptly  remedied 


«  Union  Steamboat  Co.  v.  City  of  Buffalo,  82  N.  Y.  351  (1880). 


54 


PRE-INCORPORATION   CONSIDERATIONS 


this  defect  in  the  corporation  laws,  but,  although  it  is  now 
more  than  twenty-five  years  since  this  case  was  decided, 
nothing  has  been  done,  and  many  New  York  corporations 
have  since  utilized  this  legal  method  of  evading  taxation.^ 

A  more  intricate  method  of  avoiding  taxation  sometimes 
followed  is  the  organization  of  a  company  with  the  desired 
name,  purposes,  and  capitalization  in  some  state  where  taxa- 
tion is  moderate,  as  Delaware,  Maine,  South  Dakota,  or 
Arizona.  Stock  is  issued  for  property  in  apportionment  of 
interests  and  for  other  purposes  as  necessary.  This  is  the 
actual  corporation.  A  small  operating  company  is  then  in- 
corporated in  the  state  in  which  the  business  is  really  to  be 
conducted,  with  the  same  name  and  purposes,  but  with  a 
nominal  capitalization,  possibly  only  i  per  cent  of  that  of  the 
larger  corporation.  The  smaller  corporation  then  acts  as  the 
local  agent  of  the  larger  corporation,  under  such  arrangement 
as  the  particular  conditions  indicate,  the  larger  corporation  not 
appearing  actively  in  the  conduct  of  the  business. 

If  the  small  corporation  is  to  have  an  entirely  independ- 
ent existence,  with  officers  and  stockholders  distinct  from 
those  of  the  larger  company,  it  is  usually  arranged  that  it  shall 
make  no  profits,  all  these  being  diverted  to  the  larger  corpora- 
tion. If  this  separate  existence  is  not  necessary,  the  stock 
of  the  smaller  corporation  is  held  either  by  the  larger  cor- 
poration or  by  the  stockholders  of  the  larger  corporation  in 
due  proportion.  The  officers  of  the  smaller  corporation  are 
then  usually  the  same  as  for  the  larger  corporation,  and  the 
relations  between  the  two  are  very  close. 

It  is  obvious  that  organization  fees  and  taxes  are  by 
this  device  largely  avoided,  and  that  both  state  and  local 
taxation  thereafter  are  materially  lessened  if  not  almost  en- 
tirely evaded.     The  general  plan  is,  however,  difficult  and 


3  With  most  New  York  corporations  the  new  3  per  cent  income  tax  will  make  this 
form  of  evasion  impracticable. 


COST   OF   INCORPORATION  ^^ 

complicated  and  requires  the  assistance  of  able  counsel  for 
its  proper  execution. 

In  some  states  taxes  are  arranged  upon  a  sliding  scale, 
depending  upon  the  rate  of  dividends  paid.  Where  this  is  true, 
close  corporations  not  infrequently  reduce  their  dividends 
by  the  disposal  of  profits  as  salaries,  instead  of  allowing  them 
to  accumulate  and  be  distributed  as  dividends. 

In  many  states  manufacturing  corporations  are  either  en- 
tirely released  from  the  payment  of  state  franchise  taxes  or 
are  granted  a  more  liberal  basis  or  rate.  Such  exemption 
would  naturally  be  claimed  as  far  as  possible. 

The  whole  system  of  taxation  is  unsatisfactory  and  in- 
equitable. Many  corporations  make  false  returns,  shift  cash 
accounts,  manufacture  fictitious  indebtedness,  and  resort  to 
other  expedients  of  doubtful  legality  or  morality  in  order  to 
relieve  the  burden  of  taxation.  Such  methods  are,  of  course, 
impossible  where  even  ordinary  ethics  of  honor  and  honesty 
prevail.  Indeed,  the  methods  of  avoiding  taxation  heretofore 
outlined,  and  such  others  along  the  same  lines  as  the  statutes 
of  the  various  states  may  allow,  are  not  free  from  criticism. 
They  are  legal,  but  are  evasions  of  the  spirit  of  the  law.  If, 
however,  a  legislature  in  its  wisdom  has  decreed  that  a  cor- 
poration organized  with  both  stocks  and  bonds  shall  have 
these  latter  deducted  from  the  former  in  order  to  establish  its 
taxable  status,  or  that  an  obscure  village  where  taxes  are 
light  may  be  selected  by  a  wealthy  city  corporation  as  its 
principal  office  for  taxation,  there  would  seem  no  valid  busi- 
ness reason  why  corporations  should  not  take  advantage  of 
the  situation  while  it  lasts  and  avoid  all  taxation  that  may  be 
escaped  without  fraud  and  subornation  of  perjury.  The  same 
thing  may  also  be  said  of  incorporating  in  an  outside  state 
where  taxation  is  less  and  doing  business  at  home  as  a  foreign 
corporation.  It  is  not  a  manifestation  of  the  highest  spirit  of 
civic  patriotism,  but  otherwise  it  is  not  to  be  condemned. 


56  PRE-INCORPORATION   CONSIDERATIONS 

5  47.    Counsel  Fees 

The  corporation  is  a  creature  of  the  law  and  in  its  forma- 
tion every  requirement  of  the  law  must  be  observed.  It  is 
not  sufficient  that  the  corporation  be  merely  brought  into  exist- 
ence. With  the  aid  of  a  printed  charter  form,  and  a  ready- 
made  set  of  by-laws,  even  the  inexperienced  may  do  this.  It 
must  be  incorporated  under  the  proper  forms,  with  proper 
adjustment  of  detail,  and  with  such  knowledge  of  the  condi- 
tions and  possibilities  that  it  secures  every  legitimate  advantage 
allowed  or  permissible  under  the  laws  which  authorize  its  crea- 
tion. For  this  reason  lawyers,  and  the  inevitable  concomitant, 
lawyers'  fees,  are  important  features  of  any  incorporation  in 
which  actual  values  are  involved. 

Where  cheap  incorporations  are  imperative,  or  where  the 
character  of  the  incorporation  does  not  justify  the  employment 
of  an  attorney,  the  incorporating  agencies  are  usually  em- 
ployed at  a  cost  of  from  $25  to  $50,  and  the  incorporation  is 
secured  in  one  of  the  cheaper  incorporating  states.  Usually  it 
is  not  worth  more  than  it  costs. 

For  the  better  class  of  incorporations,  where  a  really  sound 
and  effective  organization  is  desired,  the  fees  of  any  qualified 
attorney  would  hardly  be  less  than  $50,  and  from  this  would 
range  far  upward  according  to  the  complexity  of  the  arrange- 
ments, the  standing  and  experience  of  the  counsel,  and  the 
increase  of  responsibility  as  property  values  increase. 

It  is  to  be  noted  that  an  incorporation  differs  from  the 
conduct  of  litigation  in  the  fact  that  the  amount  of  work  and 
responsibihty  involved  may  be  estimated  in  advance  with  rea- 
sonable accuracy.  For  this  reason  the  proper  counsel  fees 
may  be  determined  with  precision  and  are  usually  agreed  upon 
before  incorporation  is  undertaken. 

In  determining  the  fees  the  reputation  of  the  counsel 
employed  frequently  plays  an  important  part.  The  known 
skill,  experience,  and  standing  which  make  up  the  reputation 


COST   OF   INCORPORATION  ry 

of  an  eminent  attorney  not  only  insure  the  validity  and  the 
working  value  of  the  incorporation,  but  may,  and  frequently 
do,  assist  materially  in  the  subsequent  sale  of  corporate  secur- 
ities and  in  the  general  welfare  of  the  corporation.  It  is 
obvious  that  if  the  incorporating  counsel  ranks  high,  his 
name  in  connection  with  the  corporation  is  not  only  a  guar- 
antee of  its  technical  correctness,  but  of  the  propriety  of  its 
purposes,  the  solidity  of  its  undertaking,  and,  generally,  of 
the  status  and  character  of  the  whole  enterprise. 

§  48.     Corporate  Equipment 

The  cost  of  the  stock  books,  certificates,  seal,  etc.,  neces- 
sary or  usually  employed  in  connection  with  a  corporation 
varies  widely  according  to  the  nature  of  the  outfit.  The  ordi- 
nary corporation  of  moderate  capitalization  and  pretensions, 
desirous  of  restricting  its  expenditures,  may  secure  everything 
necessary  in  neat  and  attractive  shape  for  the  modest  sum  of 
$10  or  even  less.  This  includes  stock  certificates,  printed 
on  lithographed  blanks,  the  corporate  seal,  minute  book,  stock 
book,  and  transfer  book. 

If  a  handsomer  outfit  is  required,  with  special  lithographed 
designs  for  certificates,  and  more  costly  bindings  for  books, 
the  price  of  the  oufit  will  easily  run  up  to  $40  or  $50  and 
more.  If  specially  engraved  certificates  are  requisite  or  de- 
sired, this  price  will  be  increased  to  anywhere  from  $100  to 
$500,  according  to  designs,  character,  etc.  If  bonds  are  to  be 
included  in  any  of  these  outfits  the  cost  will  be  doubled  or 
trebled,  according  to  the  quality  of  the  work  and  material. 
Loose-leaf  minute  books  range  in  price  from  $3  to  $15  accord- 
ing to  style  and  size. 

The  corporate  books  of  account  need  be  no  different 
either  in  kind  or  cost  from  those  used  by  an  unincorporated 
concern. 


Part  III— The  Stock  System 


CHAPTER   VII 

THE  CAPITALIZATION 

§  49.     Capital 

The  "capital"  of  a  corporation  is  the  total  amount  of 
its  assets  of  all  kinds  in  excess  of  liabilities,  up  to  the  amount 
of  the  outstanding  capital  stock;  assets  over  and  above  that 
amount  constitute  "surplus."^ 

The  "capital  stock"  of  a  corporation  is  the  amount  of 
stock  it  is  authorized  by  its  charter  to  issue.  This  is  the 
usual  significance  of  the  term,  though  when  used  in  the 
statutory  law  its  meaning  has  been  restricted  to  the  amount 
actually  paid  in  by  the  stockholders.^ 

The  "capitalization"  of  a  corporation  includes  not  only 
its  shares  of  capital  stock  issued  but  any  bond  issues  or  de- 
bentures that  may  be  outstanding.  These  are  termed  generally 
"corporate  securities." 

§  50.     Basis  of  Capitalization 

In  the  earlier  history  of  business  corporations,  the  capi- 
tal stock  of  any  particular  company  was  usually  determined 
by  the  amount  of  actual  cash  and  property  deemed  necessary 
for  the  corporate  purposes,  or  was  restricted  to  an  amount 
equal  to  the  cash  subscriptions  which  could  be  secured  for 


1  Williams    v.    Western    Union    Tel.    Co.,    93    N.    Y.    162    (18831);    Eauitable    Life 
Assurance    Society   v.    Union    Pacific    R.    R.    Co.,    163   App.    Div.    (N.    Y.)    81    (1914)- 

2  State  V.   Fire  Association,  23  N.  J.   L.   195   (1851);   Burrall  v.   Railroad  Company, 
75    N.   Y.   2hi    (1878);   People  v.    Morgan,   17S  N.   Y.   433    (1904). 

58 


THE   CAPITALIZATION 


59 


its  exploitation.  In  either  case  the  capitalization  was  intended 
to  represent  the  actual  cash  or  property  values  originally  put 
into  the  corporate  enterprise. 

At  the  present  time  the  theory  of  capitalization  has  been 
somewhat  modified  and  extended,  and  even  in  conservative 
operations,  at  least  a  portion  of  the  earning  value  is  usually 
included  in  the  original  capitalization. 

The  general  theory  is  simple.  Any  enterprise  may  be  con- 
sidered as  worth  the  amount  upon  which,  with  due  regard  to 
sinking  fund  and  maintenance  requirements,  it  can  pay  fair 
dividends  and  it  may  therefore  justly  be  capitalized  at  that 
figure.  In  other  words,  the  earning  capacity  of  the  enterprise 
rather  than  the  cash  value  of  the  property  involved  forms  the 
modern  basis  of  capitalization. 

As  stated  by  a  writer  of  eminence  in  financial  matters  in  a 
discussion  of  this  practice: 

^  "It  is  not  good  financing  to  capitalize  a  company  at  only 
the  value  of  its  tangible  assets — as  if  any  sum  over  that  value 
was  Vater.'  A  manufacturer  who  does  not  on  the  average 
earn  considerably  more  than  the  usual  rate  of  interest  upon 
the  actual  cost  of  his  plant  might  better  go  out  of  business 
and  invest  his  money  in  bond  and  mortgage.  Business  men 
consider  themselves  entitled  to  at  least  12J/2  per  cent  upon 
their  actual  capital.  If,  then,  assuming  high  earnings  when 
forming  a  combination,  a  banking  house  should  issue  pre- 
ferred and  common  stock  in  amounts  each  equal  to  the  value 
of  the  plant,  it  would  not  be  stock  watering.  The  difference 
between  cost  of  plant  and  earning  capacity,  whether  we  call 
it  value  of  patents  and  trade-marks  or  good- will,  is  just  as 
legitimate  an  asset  of  a  company  as  is  its  merchandise,  though 
harder  to  appraise  properly."^ 

If  fairly  done  and  kept  within  reasonable  bounds,  this 
general  basis  of  capitalization  is  hardly  open  to  serious  objec- 


'  Thomas   L.    Greene. 


6o  THE   STOCK   SYSTEM 

tion.  On  the  contrary,  in  many  cases  there  are  substantial 
business  reasons  for  its  adoption.  If  the  enterprise  be  capital- 
ized on  the  basis  of  its  immediate  cash  or  cost  value,  it  may, 
and  should,  if  meritorious,  pay  dividends  far  above  the  regu- 
lar rates  of  interest  or  the  usual  returns  on  invested  funds, 
and  this  fact  inevitably  attracts  attention,  provokes  opposition, 
and  invites  competition. 

Also  stock  in  a  dividend-paying  concern  may  usually  be 
sold  at  a  better  price  on  a  large  capitalization,  if  this  latter  be 
justified  by  the  dividend  paid,  than  it  possibly  could  on  a  more 
conservative  valuation. 

For  instance,  if  an  enterprise  were  capitalized  at,  say, 
$200,000,  on  which  it  could  earn  and  pay  a  regular  an- 
nual dividend  of  6  per  cent,  its  stock  should  sell  readily  at 
par,  or  100.  If  its  capitalization  were  reduced  one-half,  to 
$100,000,  so  that  its  regular  annual  dividend  became  12  per 
cent,  the  stock,  having  twice  the  earning  power  and  represent- 
ing the  same  corporate  property,  should  theoretically  sell  at 
twice  par,  or  200.  As  a  matter  of  fact  it  would  do  nothing 
of  the  kind,  ordinarily  bringing  from  175  to  180  according 
to  circumstances  and  showing  the  "cashing"  value  of  the 
smaller  capitalization  to  be  from  10  to  I2j^  per  cent  less  than 
that  of  the  larger.  That  is,  the  smaller  capitalization  would 
involve  a  loss  on  the  sale  of  the  entire  capital  stock  of  from 
$20,000  to  $25,000.  As  long  as  this  is  true,  enterprises  will 
be  capitalized  on  their  earning  capacity  rather  than  on  their 
actual  immediate  property  value.     This  is  treated  more  fully 

in  §  53- 

Also,  if  capital  is  to  be  raised  for  a  newly  organized  cor- 
poration, the  larger  capitalization,  if  within  reasonable  limits, 
gives  much  the  better  basis  for  the  ^'bargain  counter"  offer- 
ings so  frequently  necessary  in  the  sale  of  stock.  Greater 
inducements,  at  least  in  appearance,  may  be  offered  the 
buyer,  and,  as  suggested  in  the  preceding  paragraph,  from  the 


THE   CAPITALIZATION  5 1 

standpoint  of  future  transactions  the  position  of  the  buyer 
himself  is  better. 

For  these  and  other  reasons  the  general  practice  at  the 
present  time,  even  in  conservative  circles,  is  to  capitalize  at 
that  amount  upon  which  the  enterprise  or  undertaking  may  be 
reasonably  expected  to  pay  fair  dividends — that  is,  the  earn- 
ing capacity  is  made  the  basis  of  capitalization.  The  prac- 
tice is  often  deprecated  and  may  be  easily  carried  so  far 
under  exaggerated  estimates  of  earning  as  to  become  dan- 
gerous and  at  times  dishonest.  Kept  within  reasonable  bounds, 
however,  it  would  not  seem  to  be  objectionable  either  from 
the  standpoint  of  morals  or  sound  finance  and  it  does  give 
certain  legitimate  advantages. 

§  51.     Capitalization  at  Less  than  Real  Values 

In  many  cases  the  owners  of  small  businesses  in  which 
but  a  few  people  are  interested  and  to  which  others  are  not 
to  be  admitted,  find  it  advantageous  to  incorporate  at  a 
capitalization  much  below  the  real  value  of  the  concern. 
Other  conditions  also  arise  in  which  the  corporation  with 
capitalization  below  its  real  value  is  a  convenient  business 
mechanism.  The  arrangement  is  advisable  in  all  those  cases 
where  merely  an  apportionment  of  interest  is  desired  under 
the  corporate  form.  The  fees  and  taxes  are  thereby  kept 
at  the  minimum,  the  attention  of  competitors  is  not  attracted, 
the  organization  itself  may  be  made  very  simple,  and  every 
purpose  of  the  incorporation  is  effectively  fulfilled. 

In  states  where  a  tax  is  levied  on  the  capital  stock,  such 
tax  may  be  largely  and  legitimately  avoided  by  a  small  capital- 
ization. If  it  is  essential  that  the  full  values  be  represented 
in  some  way,  the  small  capitalization  may  still  be  retained  if 
desired  and  the  excess  be  covered  by  an  issue  of  bonds  or 
debentures. 

In    those    small    and    close    corporations    where    profits 


62  THE   STOCK   SYSTEM 

threaten  to  become  excessive  as  compared  with  the  capital- 
ization, the  dividend  rate  is  sometimes  kept  down  by  the 
distribution  of  surplus  profits  under  the  guise  of  salaries. 
It  need  hardly  be  said  that  the  plan  can  only  be  adopted 
with  justice  and  safety  when- all  the  stockholders  participate 
in  due  proportion  in  these  salary  distributions.  If  fairly 
carried  out  the  practice  is  legitimate. 

§  52.     Capitalization  at  Real  Values 

In  banks  and  other  financial  institutions  the  capital  stock 
is  fixed  at  the  amount  deemed  necessary  for  the  purposes  of 
the  business,  and  this  capital  stock  is  sold  at  par.  In  those 
states  where  a  double  liability  attaches  to  the  stock  of  financial 
institutions,  the  more  solid  of  these  require  their  subscribers 
to  pay  into  surplus  an  amount  equal  to  their  subscriptions,  or, 
in  other  words,  the  subscription  price  is  placed  at  double  the 
par  value  of  the  stock  in  order  to  cover  this  liability  in  ad- 
vance. At  the  same  time  they  thereby  establish  a  reserve  equal 
in  amount  to  their  capitalization. 

In  most  mercantile  businesses  it  is  usual  to  approximate 
the  real  value  of  the  enterprise  in  the  capitalization.  Such 
valuation  may,  it  is  true,  include  good-will,  trade-names,  and 
the  other  more  or  less  intangible  assets  of  the  business  that 
differentiate  the  going  concern  from  a  mere  stock  of  goods. 
In  any  established  business  it  is  obvious  that  these  values  are 
quite  as  actual  as  any  of  the  more  material  properties  and 
are  quite  as  properly  included  in  the  capitalization.  Their 
Inclusion,  however,  does  amount  for  all  practical  purposes  to 
a  capitalization  on  earning  power. 

§  53.     Capitalization  on  Earning  Capacity 

This  is  the  rule  in  capitalizing  corporate  combinations 
and  public  utilities.  Usually  bonds  or  preferred  stock,  or 
both,  are  issued  to  the  extent  of  the  real  values;  then  com- 


THE   CAPITALIZATION 


63 


mon  stock  is  issued  to  such  amount  as  the  estimated  earn- 
ing capacity  will  carry  after  payment  of  the  dividends  and 
interest  on  preferred  stock  and  bonds. 

The  overwhelming  volume  of  watered  stock  emanating 
from  public  utility  and  industrial  organizations  and  combina- 
tions is  attributable  to  the  excessively  optimistic  and  mislead- 
ing estimates  of  earning  capacity  made  by  promoters.  If  the 
earning  capacity  of  these  incorporations  were  actually  equal 
to  the  burdens  imposed  upon  them,  the  large  issues  of  stock 
would  from  some  points  of  view  be  fully  justified,  but  in 
most  cases  of  this  kind  the  dividends,  if  they  come,  are  uncer- 
tain and  irregular  or  entirely  inadequate. 

Referring  to  these  issues  of  watered  stock,  a  work  on  the 
subject  says: 

"Common  stock  is  a  feature  of  every  financial  plan.  When 
no  public  flotation  is  expected,  the  amount  of  common  stock 
is  a  matter  of  no  consequence.  It  usually  represents  the  con- 
trolling interest,  and  is  sometimes  placed  at  a  nominal  figure. 
In  public  flotations,  however,  common  stock  is  usually  issued 
to  capitalize  anticipated  earnings.  It  is  supposed  to  represent 
the  future  profits  of  the  property.  The  industrial  trusts,  for 
example,  issued  preferred  stock  for  the  values  of  the  separate 
companies  before  consolidation.  The  common  stock  was  sup- 
posed to  express  the  economies  and  profits  accomplished  by 
the  consolidation,  as  well  as  those  arising  out  of  the  natural 
growth  of  the  business.  Common  stock  is  usually  sold  at 
a  low  figure,  liberal  representations  concerning  anticipated 
earnings  being  made  to  influence  its  purchase.  These  repre- 
sentations are  not  often  realized."* 

In  determining  the  capitalization  of  speculative  corpo- 
rations organized  to  exploit  mines,  inventions,  and  other  un- 
certain xmdertakings,  an  even  more  liberal  spirit  prevails,  the 
promoters  estimating  future  earning  powers  on  the  basis  of 

*  "Corporation   Finance,"   by   Edward   S.    Meade. 


64  THE   STOCK   SYSTEM 

expectations.  In  some  few  cases  such  enterprises  succeed, 
the  capitaHzed  anticipations  are  reaUzed,  and  dividends  are 
paid  up  to  the  promoter's  brightest  hopes.  These  few  and 
exceptional  instances  then  become  an  alleged  justification  for 
the  overcapitalization  of  all  similar  undertakings. 

No  safe  rules  can  be  formulated  for  the  capitalization 
of  these  uncertain  enterprises.  Usually  their  stock  must  be 
sold  at  a  tremendous  discount  from  face  value.  This  calls 
for  a  proportionately  large  overcapitalization  to  which  it  is 
not  usual  to  apply  the  ordinary  principles  of  business.  Caveat 
emptor — let  the  buyer  beware. 

§  54.     Capitalization  of  Good- Will 

In  the  incorporation  of  any  going  concern  or  of  any 
combination  or  reorganization  of  going  concerns,  good- will 
is  an  asset  of  much  importance  and  is,  as  a  matter  of  course, 
included  among  the  other  assets  to  be  capitalized.  This 
practice  is  entirely  legitimate  as  the  good-will  stands  for  the 
difference  between  the  real  value  of  a  live  business  and  the 
property  value  of  the  stock,  equipments,  and  other  items 
which  make  up  its  implements  of  trade.  As  a  matter  of  fact, 
the  good-will  is  not  infrequently  the  most  valuable  asset  of  the 
concern,  even  where  other  assets  are  of  considerable  worth. 

On  account  of  the  intangible  nature  of  good-will,  its 
correct  appraisement  is  often  a  matter  of  very  considerable 
difficulty.  Its  value  varies  with  local  conditions  and  is  at 
best  almost  entirely  a  matter  of  business  judgment.  Because 
of  this  difficulty  of  accurate  valuation,  good-will  is  a  favorite 
device  for  inflating  purposes  and  frequently  affords  a  basis 
for  unjustifiable  stock  watering. 

In  the  ordinary  mercantile  incorporation,  good-will  is 
often  included  without  specific  recognition.  A  lump  sum  is  put 
upon  the  business  as  a  whole  and  the  corporation  is  capitalized 
at  the  figure  so  obtained.     At  other  times  a  separation  is 


THE   CAPITALIZATION 


65 


effected  between  the  property  assets  and  good-will.  Where 
this  is  done  common  stock  is  frequently  issued  to  the  appraised 
value  of  the  good- will,  while  the  cash  and  accounts,  stock, 
machinery,  realty,  and  other  property  assets  are  provided  for 
by  an  issue  of  preferred  stock,  the  two  issues  making  up  the 
total  capitalization  of  the  corporation. 

In  this  case  the  preferred  stock  represents  the  tangible  as- 
sets, and  its  preference  dividend  is  in  the  nature  of  a  high  in- 
terest on  the  actual  value  of  this  property.  In  the  event  of  the 
dissolution  or  liquidation  of  the  corporation,  this  preferred 
stock  is  frequently  paid  out  or  redeemed  before  the  common 
stock  receives  anything.  (See  Chapter  IX,  "Preferred 
Stock.") 

The  common  stock,  on  the  other  hand,  representing  the 
intangible  assets — the  good- will  and  earning  capacity  of  the 
business — receives  no  dividend  of  any  kind  until  all  other  obli- 
gations have  been  paid  and  then  only  out  of  surplus  profits. 

§  55.     Form  of  Capitalization 

After  deciding  upon  the  capitalization  of  an  enterprise,  a 
further  question  arises  as  to  the  form  of  this  capitalization. 
The  simplest  plan  is  to  have  only  common  stock,  but  at  times 
there  are  material  advantages  in  the  use  of  preferred  stock. 

Preferred  stock  occupies  a  position  between  common  stock 
and  the  bond.  It  is  a  safer  form  of  investment  than  com- 
mon stock,  but  it  carries  no  rights  of  foreclosure.  It  takes 
precedence  of  common  stock  as  to  payment  of  dividends  and 
frequently  as  to  its  ultimate  redemption,  but  its  dividend  is 
not  payable  unless  earned.  Its  dividend  is  fixed  and  it  does 
not  as  a  rule  participate  in  excess  profits,  but  its  rate  is  usually 
much  higher  than  the  interest  rate  of  a  bond.  Where  pre- 
ferred stock  can  be  used  to  raise  money  it  is  regarded  as  a 
much  more  satisfactory  means  than  an  issue  of  bonds.  (See 
Chapter  IX,  "Preferred  Stock.") 


^  THE  STOCK  SYSTEM 

§  56.    Bond  Issues 

Where  a  corporation  has  real  property  or  invests  in  prop- 
erty having  a  tangible  value,  it  is  often  of  advantage  to  issue 
bonds  in  place  of  some  portion  of  the  stock  capitalization.  An 
enterprise  requiring  $150,000  in  actual  value  might,  instead 
of  capitalizing  for  that  amount,  incorporate  for  but  $100,000 
and  then  issue  bonds  for  the  additional  $50,000. 

The  interest  to  be  paid  on  these  bonds  would  be  less  than 
the  dividends  a  prosperous  business  would  pay  upon  the  same 
amount  of  stock,  and  the  difference  represents  a  profit  for  the 
stock  actually  issued.  Against  this  is  the  fact  that  the  interest 
must  be  paid  whether  profits  justify  it  or  not,  as  also  the  fur- 
ther fact  that  if  interest  is  not  paid  foreclosure  proceedings 
will  probably  bring  the  corporation  to  an  untimely  termination 
or  to  a  reorganization.  In  this  latter  case  the  proceedings  are 
usually  disastrous  and  most  of  the  assets  are  likely  to  be 
absorbed  in  settling  the  claims  of  the  bondholders.  Because 
of  this  the  issuing  of  bonds  is  not  safe  unless  the  corporation 
is  sound  and  of  reasonably  quick  earning  powers.  If  there 
is  any  doubt  on  these  points,  preferred  stock,  the  security  next 
to  bonds  in  safety  and  desirability,  is  the  more  prudent  method 
of  raising  money.     (See  Chapter  LI,  "Bonds.") 

§  57.     Capitalization  as  Affected  by  Financial  Exigencies 

If  an  enterprise  is  speculative  in  its  character  and  the 
owners  expect  direct  profits  from  its  financing,  or  if  promo- 
tion payments  are  added  to  the  load  under  which  the  new  cor- 
poration is  expected  to  stagger  to  success,  the  conditions  do 
not  tend  to  conservative  capitalization.  In  such  cases  the  im- 
mediate financial  necessities  take  precedence  of  almost  every- 
thing else  and  the  capitalization  is  shaped  to  that  end.  Profits 
for  owners  and  promoters,  bonus  stock,  commissions,  adver- 
tising, and  the  general  expenses  of  financing  are  included  un- 
til finally  the  actual  business  necessities  of  the  corporation  rep- 


THE   CAPITALIZATION 


67 


resent  but  a  fraction  of  the  total  capitalization,  and  the  final 
arrangement  at  times  comes  dangerously  close  to  being  a  fraud 
upon  the  investing  public. 

It  is  unfortunate  that  the  capitalization  of  a  corporation 
should  be  influenced  by  considerations  such  as  these.  At  times, 
however,  an  enterprise  will  be  of  such  a  purely  speculative  na- 
ture that,  with  all  honesty  of  purpose,  it  would  be  impossible 
to  finance  it  on  any  conservative  basis.  Concessions  to  the 
necessities  of  the  situation  are  then  imperative,  divergencies 
from  the  ideal  corporate  arrangements  cannot  be  avoided,  and 
the  best  that  can  be  done  is  to  reduce  them  to  the  minimum. 
In  such  cases  the  real  interests  of  the  corporation — which  are 
the  successful  inauguration  and  prosecution  of  its  business  and 
the  production  of  profits  for  its  stockholders — should  be  kept 
closely  in  view  and  only  such  concessions  made  as  are  abso- 
lutely essential  to  successful  financing. 


CHAPTER   VIII 

STOCK 

§  58.     Capital  Stock 

The  capital  stock  of  a  corporation  is  the  maximum  amount 
of  stock  it  may  issue  under  the  provisions  of  its  charter.  This 
may  bear  some  direct  relation  to  the  actual  property  values 
or  "capital"  possessed  by  the  corporation — from  which  it  is  to 
be  absolutely  distinguished — or  may  be  far  above  or  below  this 
real  capital.  (See  §62.)  The  stock  capitalization  may  be 
based  on  the  actual  cash  value  of  the  corporate  property,  or  on 
the  amount  required  for  the  development  of  the  undertaking, 
or  on  the  earning  power  of  the  corporate  business,  or  on  the 
speculative  basis  of  what  these  earning  powers  may  be  when 
the  business  is  developed,  or  on  some  combination  of  these 
factors. 

The  capital  stock  of  a  corporation  is  fixed  by  its  charter 
and  can  usually  be  increased  or  diminished  only  by  amendment 
of  that  instrument.  In  some  few  states,  however,  as  in  West 
Virginia,  charters  are  issued  empowering  the  corporation  it- 
self, within  certain  limits,  to  determine  the  amount  of  its 
capital  stock. 

The  capital  stock  of  a  corporation  may  be  issued  in  part  or 
in  whole  and  its  total  authorized  amount  bears  no  necessary 
relation  to  the  amount  of  stock  sold,  subscribed,  or  outstand- 
ing. For  instance,  a  corporation  with  a  capital  stock  of 
$100,000  might  have  issued  one-half  of  this  amount,  the  re- 
mainder being  reserved  for  subsequent  use.  The  outstanding 
stock  is  then  $50,000,  but  its  capital  stock  is  $100,000  and  re- 
mains at  this  amount  until  changed  by  amendment  of  the 
charter  or  other  statutory  method. 

68 


STOCK 


69 


In  this  connection  it  should  be  noted  that  formerly,  when 
the  common  law  controlled,  a  corporation  was  required  to 
have  its  entire  capital  stock  subscribed  before  beginning  busi- 
ness. Until  this  was  done  it  could  not  enforce  the  subscrip- 
tions to  its  stock.^  Now,  however,  in  most  states  the  strin- 
gency of  this  rule  has  by  statutory  enactments  been  greatly 
relaxed.  Some  minimum  amount,  fixed  by  statute  and  usually 
much  smaller  than  the  total  stock  capitalization,  may  be  desig- 
nated by  the  charter  as  the  amount  with  which  the  corporation 
will  begin  business,  and  so  soon  as  this  amount  has  been 
subscribed  the  corporation  can  enforce  subscriptions  to  its 
stock  and  may  begin  its  operations.  In  a  few  states  a  fur- 
ther proportion  of  the  capital  stock  must  be  paid  in  within 
a  specified  time,  as  in  New  York  where  a  corporation  must 
have  at  least  one-half  its  total  capital  stock  paid  up  within  one 
year  from  the  date  of  incorporation." 

§  59.     Shares 

For  the  sake  of  accuracy  and  convenience  in  represent- 
ing the  interests  of  the  various  stockholders  in  the  capitaliza- 
tion and  in  the  corporate  enterprise  and  property  behind 
it,  capital  stock  is  divided  into  shares  which  are  almost 
invariably  of  equal  face  value,  and  together  make  up  the  whole 
stock  capitalization.^  In  the  absence  of  statutory  restriction 
there  seems  no  reason  why  a  corporation  may  not  issue  com- 
mon and  preferred  stock  of  different  par  values.  In  New 
York  a  provision  in  the  corporate  charter  for  such  an  arrange- 
ment would  probably  be  upheld.*    In  California,  however,  such 


1  See   I    Cook   on    Corp.,    §§  176-181. 

'  This  law  is  largely  a  dead  letter,  as  no  one  is  charged  with  its  enforcement  and 
no   penalty  is   imposed   for  failure   to   comply   with   its  provisions. 

»In  England  there  is  a  distinction  made  between  stock  and  shares.  "Stock  is 
distinguishable  from  shares  by  being  divided  into,  and  transferable  in,  odd  and 
varying  amounts,  ranging  from  tens  of  thousands  down  to  a  penny  in  some  cases. 
....  Its  distinguishing  feature,  which  divides  it  from  shares  and  bonds,  is  this 
fact  that  it  can  be  split  up  into  any  odd  amount."  "Stocks  and  Shares,"  by  Harley 
Withers. 

*  See   White   on    Corporations    (8th   Ed.)f   P-    442. 


70 


THE   STOCK   SYSTEM 


a  provision  has  been  held  invalid  on  the  ground  that  it  is  in 
contravention  of  the  statute  declaring  that  no  distinction  shall 
be  made  between  classes  of  stock  as  to  voting  power.^ 

Unless  restricted  by  statute,  shares  may  be  of  any  desired 
face  value,  though  the  greater  portion  of  the  issued  stock  of 
this  country  is  in  the  form  of  $ioo  shares.  Mining  stocks  are 
often  issued  in  shares  of  the  face  value  of  $i,  this  being 
done  with  a  view  to  more  impressive  offerings  and  to  the 
reception  of  smaller  subscriptions  than  could  well  be  taken 
with  larger  shares.  In  any  enterprise  to  be  financed  by  popular 
subscription,  a  small  share  value  is  considered  good  policy, 
$io  being  a  figure  frequently  selected.  Where  the  holders  of 
stock  are  few  in  number  and  it  is  desired  to  render  the  sale  or 
other  disposition  of  the  stock  difficult,  or  other  reasons  make 
such  course  advisable,  the  face  value  of  the  shares — where  not 
prohibited  by  statute — is  sometimes  placed  at  $500  or  more. 
The  shares  of  the  Carnegie  Company  were  $1,000  each,  but 
the  United  States  Steel  Corporation  placed  its  shares  at  $100 
in  order  to  facilitate  their  sale  to  the  investing  public.  Unless 
there  is  some  valid  reason  to  the  contrary,  the  generally  recog- 
nized share  value  of  $100  is  to  be  preferred  and  selected. 

An  interesting  innovation  in  share  values  is  the  share  of 
unspecified  value,  that  is,  a  share  without  any  named  par  value, 
such  share  merely  representing  a  fractional  interest  in  the 
profits  and  assets  of  the  corporate  enterprise.  It  is  argued 
that  such  shares,  lacking  the  "price  ticket"  of  a  nominal  value, 
will  force  the  investing  public  to  investigate  the  real  value  of 
the  enterprise  and  the  real  probability  of  profits,  and  thus 
determine  the  real  value  of  the  shares  much  more  surely  and 
quickly  than  under  the  present  system  of  valued  shares. 

After  agitation  on  the  subject  covering  some  years,  the 
New  York  legislature,  in  19 12,  passed  a  law  providing  for  the 
issuance  of  unvalued  shares  of  this  nature.    In  191 5,  168  cor- 


•*  Film  Producers  Inc.  v.  Jordan,   154  Pac.    (Cal.)   605  (1916). 


STOCK  71 

poratlons  were  organized  in  New  York  with  shares  having  no 
par  value.  Maryland,  Delaware  and  Maine  have  passed 
similar  laws.  It  is  still  too  early  to  predict  whether  the  device 
will  prove  of  very  great  usefulness,  but  it  is  probable  that 
similar  provisions  will  be  incorporated  in  the  statutes  of  other 
states.  A  summary  of  the  esssential  features  of  the  New  York 
legislation  follows:^ 

(Sec.  19.)  Upon  formation  or  reorganization,  any  busi- 
ness corporation  may  provide  for  the  issuance  of  unvalued 
shares  (other  than  preferred  shares)  without  any  nominal 
or  par  value,  by  stating : 

1.  The  number  of  shares  that  may  be  issued,  and,  if  any 
stock  is  preferred,  the  preferences,  with  the  amount,  character 
and  par  value  of  such  preferred  stock,  which  shall  be  $5  or 
some  multiple  of  $5  up  to  but  not  exceeding  $100. 

2.  The  amount  of  capital  which  it  will  use  in  conducting 
its  business.  This  must  be  not  less  than  $500  and  not  less 
than  the  par  value  of  the  preferred  stock,  plus  $5  or  some 
multiple  of  $5  for  every  share  of  other  (unvalued)  stock. 

Each  share  of  unvalued  stock  must  be  equal  and  each 
certificate  shall  have  written  or  printed  thereon  the  number  of 
unvalued  shares  represented  by  it,  and  the  entire  number  of 
such  shares  authorized. 

The  corporation  may  sell  such  unvalued  shares,  for  such 
consideration  as  may  be  prescribed  (i)  in  the  charter;  or  (2) 
at  their  fair  market  value,  the  judgment  of  the  board  of 
directors  as  to  such  fair  market  value  being  conclusive  in  the 
absence  of  fraud;  or  (3)  the  price  may  be  fixed  by  consent 
of  two-thirds  of  each  class  of  shares  voting  at  a  duly  assembled 
stockholders*  meeting. 

All  unvalued  stock  so  issued  shall  be  deemed  full-paid 
and  non-assessable. 


"  Stock  Corporation  Law  (Consol,   Laws,  Ch.  59),  as  amended  by  Ch.  35,1,  Laws  of 
1912,   §§  19-21,  and  Laws  of  1917,   Ch.  soa 


72'  THE    STOCK   SYSTEM 

(Sec.  20.)  Such  corporation  shall  not  begin  business  or 
incur  debt  until  the  amount  of  capital  stated  in  the  charter 
shall  have  been  paid  in  money  or  property  at  actual  value. 
Violation  of  this  prohibition  makes  directors  assenting  per- 
sonally liable. 

(Sec.  21.)  The  organization  tax  on  such  corporations 
shall  be  five  cents  on  each  share  of  unvalued  stock.  The 
stamp  transfer  tax  shall  be  two  cents  on  each  share. 

The  use  of  the  unvalued  share  is,  of  course,  optional, 
the  law  merely  giving  the  right  to  organize  under  its  provisions 
if  desired.  — 

If  a  corporation  were  organized  under  the  unvalued  share 
law,  say  with  800  shares,  each  share  would  represent  a  one 
eight-hundredth  interest  in  the  corporate  property  and  busi- 
ness, and  its  dollars  and  cents  value  could  be  told  only  by 
determining  the  value  of  the  corporate  property  and  business, 
and  dividing  this  value  by  800.  Thus,  if  the  estimated  values 
owned  by  the  corporation  amounted  to  $42,400,  each  share 
would,  in  the  absence  of  other  modifying  conditions,  be  worth 

$53. 

As  a  matter  of  fact,  this  would  be  equally  true  with  the 
same  number  of  shares  of  a  specified  par  value.  It  is  obvious 
that,  if  800  shares  of  stock  are  issued  by  a  corporation,  the 
value  of  each  share  is  exactly  the  same  whether  its  par  value 
be  $10,  $100,  or  nothing  at  all.  No  matter  what  its  face  or 
par  value  may  be,  it  represents  merely  its  due  fractional  in- 
terest in  the  corporate  business  and  property.  When,  how- 
ever, a  money  value  is  placed  upon  a  share,  there  is  an  irresist- 
ible tendency  to  consider  it  as  worth  this  value,  or  at  least  to 
consider  this  value  as  a  basis  upon  which  to  establish  the  true 
value,  and  it  is  to  escape  from  this  tendency  that  the  unvalued 
share  has  been  devised.  Whether  it  will  make  for  any  juster 
or  more  accurate  estimates  of  share  values,  experience  only 
can  show. 


STOCK  73 

§  60.     Certificates  of  Stock 

A  certificate  of  stock  is  merely  a  convenient  evidence  of 
the  ownership  of  corporate  shares,  and  its  loss  or  destruc- 
tion does  not  affect  such  ownership  in  any  way.  The  loss  of 
the  certificate  may  embarrass  the  stockholder  on  occasion,  just 
as  the  loss  of  a  deed  to  real  estate  or  bill  of  sale  to  other 
property  might  be  embarrassing,  but  he  can  still  collect  his 
dividends,  attend  and  vote  at  stockholders'  meetings,  and 
generally  perform  his  functions  as  a  stockholder  just  as  he 
did  before  the  loss  of  his  certificate.  If  he  wishes  to  sell  or 
otherwise  transfer  his  interest  in  the  corporation,  his  certificate 
would  probably  have  to  be  replaced  before  the  purchaser  or 
transferee  w^ould  consent  to  take  over  the  stock.  Usually 
the  corporate  by-laws  provide  for  the  issue  of  a  new  certificate 
in  case  of  loss  or  destruction  of  one  already  issued.  The  mat- 
ter is,  however,  troublesome  at  the  best,  generally  necessitat- 
ing the  giving  of  a  bond  or  other  guarantee  to  the  corporation, 
and  the  loss  of  certificates  is  to  be  avoided  if  possible.     (See 

§181.) 

It  is  to  be  noted  that  the  certificate  of  stock  is  purely  a 
matter  of  form  and  convenience,  that  the  ownership  of  stock 
may  and  frequently  does  exist  before  any  certificates  are 
issued,  and  that  it  would  be  entirely  possible  to  conduct  a  cor- 
poration— with  the  consent  of  its  stockholders — without  the 
issue  of  certificates  at  all,  the  stock  books  of  the  corporation 
then  being  the  sole  evidence  of  stock  ownership. 

While  this  is  true,  stockholders  are  entitled  to  certificates 
evidencing  the  stock  owned  by  them  and  can  force  the  issue 
of  such  certificates  if  withheld.  This  right  must,  however, 
be  exercised  within  proper  limits.  Stockholders  are  not  there- 
by authorized  to  make  nuisances  of  themselves  and  harass  the 
secretary  by  unreasonable  exactions  such  as  excessive  trans- 
fers, or  demands  for  large  numbers  of  small  certificates,  or 
for  issues  of  fractional  parts  of  a  share,    To  curb  the  tendency 


74 


THE   STOCK   SYSTEM 


in  this  direction,  the  secretary  is  sometimes  empowered  by  the 
by-laws  to  charge  a  small  fee  for  each  certificate  issued  by  him. 
This  is  legally  permissible  and  is  usually  sufficient/ 

At  common  law,  certificates  of  stock  are  not  negotiable, 
and  if  the  owner  of  a  certificate  of  stock  loses  it  or  it  is  stolen 
from  him  when  indorsed  in  blank,  a  subsequent  bona  fide  pur- 
chaser of  such  stock  is  not  protected  against  the  true  owner, 
unless  the  owner  was  guilty  of  negligence.^  By  mercantile 
custom,  however,  stock  certificates  have  been  largely  treated  as 
negotiable  instruments,  and  in  a  number  of  states  certificates 
of  stock  have  been  made  negotiable  instruments  under  a  statute 
generally  known  as  the  "Uniform  Stock  Transfer  Act/'^ 

§  6i.     Unissued  Stock 

A  corporation  is  empowered  by  its  charter  to  issue  stock 
up  to  the  full  amount  of  its  authorized  capital  stock.  At  the 
time  the  charter  is  allowed  all  this  stock  is  unissued.  There- 
after it  may  be  issued,  in  whole  or  in  part,  at  the  discretion  of 
the  corporation  or  as  required  by  its  operations.  The  unissued 
stock,  no  matter  whether  it  be  the  whole  capital  stock  or  only 
a  reserved  portion  thereof,  represents  nothing  whatever  beyond 
the  potential  right  of  issue.  It  has  no  intrinsic  value.  It  is 
merely  the  right,  granted  by  the  state,  to  issue  stock  up  to 
the  prescribed  amount. 

This  being  so,  the  unissued  stock  cannot  in  any  way  be 
regarded  as  an  asset  of  the  corporation.  If  sold  it  brings  in 
cash,  property,  or  other  value  that  have  a  greater  or  less  intrin- 
sic worth,  but  the  outgoing  stock  carries  with  it  an  interest  in 
the  corporate  property  that  should  equal  the  value  received  for 
such  stock.  The  general  corporate  property  has  been  increased, 
but  the  ownership  thereof  has  likewise  been  increased  in  the 


Drthwest    Mortgage   Co.,    102   Fed.    Rep.    584   (1900). 
§358,  Knox  V.   Eden   Musee  Co.,   148  N.   Y.  441'  (1896). 
York,    Ohio,     Pennsylvania,    Rhode     Island,  Wisconsin, 


■^  Giesen   v.    London    &    Northwest    Mortgage    Co. 
'  I    Cook  on  Corporations, 

•  These    States    are    New    York,    Ohio,     Pennsylvania, 
Alaska,   Louisiana,   Maryland,   Massachusetts,   Michigan,   New  Jersey. 


STOCK  72 

same  proportion.  In  bookkeeping  parlance  the  increase  of 
assets  and  liabilities  is  exactly  equal.  The  unissued  stock 
therefore  represents  nothing  more  than  the  right  to  admit  new 
members,  or  stockholders,  into  the  corporation,  upon  payment 
of  the  proper  quid  pro  quo.  To  regard  it  as  an  asset  would 
be  as  illogical  as  to  consider  the  right  to  adrnit  new  partners 
in  a  firm  an  asset  of  the  partnership.     (See  §  80.) 

§  62.     Issued  Stock 

Stock  is  always  supposed  to  be  issued  at  its  face  or  par 
value  for  cash  or  other  actual  values.  At  the  time  of  organiza- 
tion, therefore,  the  face  value  of  the  stock  issued — if  full- 
paid — would,  theoretically,  equal  the  actual  value  of  the  cor- 
porate assets.  Even  if  this  be  true  in  fact,  these  values  may, 
and  generally  do,  vary  widely  thereafter.  If  the  corporation 
is  successful,  its  assets  may  increase  far  beyond  the  nominal 
value  of  its  issued  stock,  while  if  unsuccessful  these  assets  will 
probably  fall  far  below  the  total  face  value  of  the  issued  stock. 
That  is,  the  value  of  such  stocks  as  shown  by  the  books  of  the 
corporation  will  be  far  above  or  below  the  par  value.  The  sell- 
ing price  may,  and,  depending  largely  upon  the  rate  of  divi- 
dends maintained  and  the  general  desirability  of  the  stock, 
probably  will  be  at  a  still  different  figure. 

Frequently  a  corporation,  by  purchase,  gift,  or  otherwise, 
regains  its  issued  stock.  Such  stock  coming  back  into  the 
possession  of  the  corporation  is  not  retired  thereby  or  brought 
back  into  the  condition  of  unissued  stock,  but  is  designated 
as  treasury  stock,  may  be  sold  when  desirable,  and  is  usually 
regarded  as  an  asset.    (See  Chapter  XI,  "Treasury  Stock.") 

§  63.     Full-Paid  Stock 

In  the  absence  of  statutory  lazvs  to  the  contrary,  stock 
may  be  issued  on  any  basis  that  the  directors,  with  the  assent 
of  the  stockholders,  deem  best.    That  is,  it  may  be  issued  for 


76 


THE   STOCK   SYSTEM 


its  full  face  value  in  money  or  propetf-ty,  or  for  only  a  portion 
of  its  face  value,  or  on  a  promise  to  pay,  or  on  partial  pay- 
ments, or  on  no  payment  at  all  as  a  free  gift.^'^  If,  however, 
it  is  not  paid  for  at  its  full  face  value  in  money,  property,  or 
services — where  payment  is  allowed  by  services— it  is  not  full- 
paid  stock,  and  therefore  carries  a  liability  to  non-assenting 
stockholders  and  to  creditors  of  the  corporation  for  the  amount 
still  unpaid."     (See  Chapter  X,  "Full-Paid  Stock.") 

The  courts  have  shown  a  tendency  of  late  years  to  con- 
strue the  law  more  strictly  against  any  dubious,  unfair,  or  in- 
equitable payment  of  stock  when  the  rights  of  creditors  or 
stockholders  are  concerned. ^^ 

The  term  "watered  stock"  is  merely  a  convenient  desig- 
nation for  stock  issued  in  excess  of  the  values  behind  it.     (See 

§  64.     Common  and  Preferred  Stock 

Preferred  stock  is  that  to  which  some  preference  has  been 
given  over  other  stock  of  the  same  corporation  as  to  partici- 
pation in  profits,  and  often  in  assets  in  case  of  liquidation.  If 
there  is  no  distinction  in  regard  to  these  two  features  the  stock 
of  a  corporation  is  all  common  stock. 

Different  preferred  stocks  may  be  issued  by  the  same  cor- 
poration in  any  desired  variety  of  preference  as  to  dividends 
and  redemption  or  liquidation  rights.  These  are  distinguished 
from  each  other  as  first,  second,  and  third  preferred  stock,  or 
by  other  designations  descriptive  of  the  peculiar  status  of  each 
stock.    The  lowest,  or  non-preferred,  stock  is  common  stock. 


"3  Clark  &  Marshall  on  Corp.,  §  390a  and  cases  cited;  i  Cook  on  Corp.,  §§30, 
46,  Scovill  V.  Thayer,  105  U.  S.  143  (1881) ;  Goodnow  v.  Amer.  Writing  Paper  Co., 
66  Atl.  (N.  J.)  607  (1907).  ^  ,,     ^ 

"2  Clark  &  Marshall  on  Corp.,  §§307.  40t  ;  Camden  v.  Stuart,  144  U.  S.  104 
(1892);  Merchants'  etc.,  Aeencv  v.  Davidson,  23  Cal.  App.  274  (1913) ;  but  contra, 
Christensen    v.    Eno,    106    N.    Y.    97    (1887);    Southworth    v.    Morgan,    205    N.    Y.    293 

"See  V.  Heppenheimer,  69  N.  J.  Eq.  36  (1905);  Arnold  v.  Searing,  73  N.  J.  Eq. 
262  (19071);  s.  c,  78  Atl.  Rep.  762  (1910);  Mason  v.  Carrothers,  105,  Me.,  392  (1909);  Old 
Dominion  Copper  Co.  v.  Bigelow,  188  Mass.  315'  (1905);  s.  c,  203  Mass.  159  (1909); 
Bigelow  V.  Old  Dominion  Copper  Co.,  74  N.  T  Eq.  457  (1908);  same  facts  in 
Old   Dominion   Copper   Co.   v.   Lewisojin,   210  U.   S.   206   (1908). 


STOCK 


77 


§  65.     Other  Classifications 

As  stated,  the  capital  stock  of  a  corporation  may  be 
divided  into  common  and  preferred  stock  on  the  basis  of  its 
relation  to  the  corporate  profits  or  property.  Stock  may  also 
be  classified  in  other  ways.  Most  of  these  other  classifications 
relate  to  the  voting  right.  The  simplest  is  a  division  of  the 
stock  into  two  classes,  one  class  voting,  the  other  not  exercis- 
ing this  right.  (This  classification,  however,  would  not  be 
permitted  under  the  California  statute.)  For  instance,  in  the 
incorporation  of  a  partnership  where  one  or  more  take  the 
active  management,  others  merely  supplying  the  capital,  the 
active  partners  might  have  their  interests  represented  by  voting 
stock  and  the  interest  of  the  silent  partners  represented  by 
non-voting  stock.  (See  Chapter  LVI,  "Incorporating  a  Part- 
nership.") 

Other  classifications  are  possible  in  considerable  variety, 
and,  generally,  it  may  be  said  that  any  desired  classification 
is  allowable  that  is  not  repugnant  to  equity,  to  the  common 
law,  or  to  the  statute  law  of  the  state  under  which  the  cor- 
poration is  organized.  On  the  other  hand,  it  may  be  said  that 
unusual  classifications,  unless  clearly  demanded  by  the  con- 
ditions, are  not  to  be  recommended.  They  may  work  unex- 
pected hardships,  are  at  times  very  uncertain  in  their  actions, 
and  introduce  undesirable  complexities  into  the  corporate 
mechanism. 

Classifications  of  stock  may  be  authorized  either  by  charter 
or  by-law  provisions.  As  a  matter  of  prudence  they  should 
be  incorporated  in  the  charter  where  possible.  The  specifica- 
tions relating  to  any  class  of  stock,  except  unmodified  com- 
mon stock,  should  be  printed  in  full  on  the  face  of  each  certi- 
ficate by  which  such  stock  is  represented.  (See  §§  64,  65,  364, 
425.) 


CHAPTER    IX 

PREFERRED    STOCK 

§  66.     Nature  and  Use 

Preferred  stock  is  that  which  has  some  preference  as  to 
dividends  or  assets  over  other  stock  of  the  same  corporation. 
This  preference  is  usually  given  to  make  such  stock  safer  or 
more  attractive,  though  at  times  its  purpose  is  to  limit  divi- 
dends or  gain  some  other  desired  end. 

The  use  of  preferred  stock  is  general.  It  is  perhaps  most 
commonly  employed  where  money  is  to  be  raised  for  the  de- 
velopment or  operation  of  a  corporate  enterprise.  For  this 
purpose  it  may  be  made  to  offer  greater  safety  both  as  to 
principal  and  dividends  than  common  stock,  while  it  does  not 
carry  the  dangerous  foreclosure  privilege  of  the  bond. 

When  a  business  is  incorporated,  preferred  stock  is  fre- 
quently issued  to  represent  or  pay  for  the  actual  property  as- 
sets; the  good-will  and  other  intangible  assets  being  repre- 
sented by  an  issue  of  common  stock.  When  a  partnership  is 
incorporated,  the  excess  investment  of  one  partner  is  very  often 
represented  or  satisfied  by  an  issue  of  non-voting  preferred 
stock,  while  the  interests  of  a  silent  partner  may  be  conven- 
iently cared  for  by  the  same  means.  Where  an  invention  or 
other  property  is  taken  over  and  payment  made  in  stock,  the 
transferrer,  on  account  of  its  greater  safety,  will  frequently 
demand  a  portion  or  the  whole  of  his  price  in  preferred  stock, 
and,  generally,  the  device  will  be  found  most  useful  in  effecting 
the  adjustments  and  allowances  so  frequently  necessary  in 
incorporating. 

Usually  preferred  stock  is  created  by  charter  provision, 

78 


PREFERRED    STOCK  79 

the  preferences  and  restrictions  being  set  forth  at  length.  In 
many  states  it  may  be  authorized  by  proper  by-law  provisions, 
but  it  is  always  better  and  safer  to  provide  for  it  in  the 
charter.^ 

After  incorporation,  unless  otherwise  provided  by  statute, 
the  assent  of  every  stockholder  is  required  for  the  issue  of  pre- 
ferred stock.  This  is  reasonable,  as  the  value  of  the  common 
stock  may  be  depreciated  by  such  an  issue.  In  many  states 
the  statutes  allow  preferred  stock  to  be  issued  after  incor- 
poration when  authorized  by  a  prescribed  majority  of  the  out- 
standing stock.  ^ 

Preferred  stock  is  issued  in  many  different  forms  and 
with  many  different  classifications,  privileges,  and  restrictions. 
The  possible  range  is  wide  and  includes  almost  any  desired 
attribute  not  contrary  to  law  or  public  policy.  All  the  condi- 
tions of  any  particular  issue  should  appear  upon  the  face  of  the 
certificate  by  which  such  preferred  stock  is  represented.  If 
the  specifications  are  too  voluminous  for  this,  the  fact  that 
the  certificate  represents  preferred  stock  should  appear  plainly 
on  its  face,  together  with  a  reference  to  the  provisions  of  the 
charter  by  which  such  stock  is  authorized.  Such  notice  is 
sufficient  to  put  any  intending  purchaser  on  his  guard,  and  if 
he  purchases  the  stock  he  cannot  afterward  assert  ignorance 
of  its  conditions  as  a  basis  for  litigation  or  claims  against  the 
corporation. 

Unless  specifically  prohibited  therefrom  by  proper  provi- 
sion in  the  charter,  by-laws,  or  other  authorization  under  which 
such  stock  is  issued,  preferred  stock  carries  the  right  to  vote 
and  the  right  to  participate  in  dividends  beyond  the  preferen- 
tial dividend  after  the  common  stock  has  received  a  dividend 
equal  thereto.    That  is,  in  any  year,  if  the  preferred  dividend 


1 1  Machen  on  Corp.,  §  528;  i  Cook  on  Corp.,  §  268;  Toledo,  etc.,  R.  R.  v. 
Trust  Co.,  95  Fed.  497.  (1899);    Kent  v.   Quicksilver  Mining  Co.,   78  N.   Y.   159  u879)- 

a  Hinckley  v.  S.  &  S.  Co.,  107  App.  Div.  (N.  Y.)  470  (1905O ;  s.  c,  19a  N.  Y. 
599   (1908). 


8o  THE   STOCK   SYSTEM 

is  paid  and  the  common  stock  has  received  a  dividend  equal  in 
amount  to  this  preferential  dividend,  then  any  further  divi- 
dends belong  to  and  must  be  paid  to  all  the  stock,  common  and 
preferred  alike.  (See  §  70.)  Preferred  stock  is  also  entitled 
to  cumulative  dividends  unless  otherwise  provided.  Preferred 
stock  has  no  preference  over  common  stock  in  the  distribution 
of  assets  in  case  of  liquidation  or  dissolution,  unless  such 
preference  is  specifically  given  by  statute  or  set  forth  in  the 
authorizing  provisions. 

Preferred  stock  differs  from  a  bond  issue  in  the  very 
material  feature  that  interest  on  bonds  must  be  paid  v^hen 
due  and  can  be  enforced  by  a  foreclosure  suit,  while  dividends 
on  preferred  stock  are  payable  only  from  net  profits  and,  if 
profits  are  not  made,  are  not  due  and  therefore  cannot  be  col- 
lected. Also,  bonds  must  be  paid  on  maturity,  while  preferred 
stock  has  no  fixed  due  date.  Bondholders  are  creditors  of  the 
company.  The  holders  of  preferred  stock  are  not  creditors 
of  the  company,  have  no  claim  against  the  company  except 
for  dividends  when  declared,  and  have  no  rights,  save  for 
their  preferences,  superior  to  those  of  the  common  stock- 
holders.^ For  these  reasons  the  issue  of  preferred  stock  is 
much  safer  for  the  ordinary  corporation  than  the  issue  of 
bonds.  Preferred  stock  is  much  favored  in  the  formation  of 
industrial  trusts. 

Sometimes  an  attempt  is  made,  in  order  to  interest  in- 
vestors, to  issue  special  forms  of  securities  which  shall  have 
for  the  investor  the  advantages  both  of  preferred  stock  and  of 
bonds.  So  far,  all  such  attempts  have  been  unsuccessful.  The 
courts  will  not  permit  the  same  security  to  create  the  two  in- 
consistent relationships  of  stockholder  and  secured  creditor. 
Irrespective  of  what  the  security  may  be  called,  they  will  look 
behind  the  name,  determine  the  essential  character  of  the 


«i  Cook  on  Corp.,  §271;  Warren  v.  King,  108  U.  S.  389  (i88ij);  St.  John  v. 
Erie  Ry.  Co.,  22  Wall.  136  (1874) ;  Field  v.  Manufacturing  Co.,  ida  Mass.  388 
(1894);    Ellsworth   V.    Lyons,    181    Fed.    55    (1910), 


PREFERRED    STOCK  gl 

security,  whether  it  is  that  of  a  bond  or  of  stock,  and  Hmit  the 
holder  to  such  rights  as  lawfully  belong  to  that  class  of  se- 
curity. 

In  many  states  there  are  statutory  provisions  relating  to 
preferred  stock  which  must  be  consulted  when  the  subject  is 
under  consideration,  these  statute  laws  taking  precedence  of 
the  general  or  common  law  herein  set  forth.  Statutory  author- 
ization for  the  issue  of  preferred  stock  is  not  necessary.*  The 
provisions  creating  preferred  stock  should  be  framed  with 
care,  for  the  law  reports  abound  with  suits  arising  from  ill- 
defined  preference  stock  rights.^ 

§  67.     Preference  as  to  Dividends 

The  following  extract  gives  a  common  form  of  charter 
provision  authorizing  the  issue  of  a  simple  preferred  stock: 

"Of  said  capital  stock,  five  hundred  shares  of  the  par  value 
of  fifty  thousand  dollars  shall  be  preferred  stock,  entitled  to 
receive  from  the  net  earnings  of  the  company  an  annual  divi- 
dend of  6  per  cent  before  any  dividends  are  paid  upon  the 
common  stock." 

The  holder  of  a  preferred  stock,  such  as  provided  in  the 
paragraph  quoted,  would  have  the  same  voting  right  as  the 
holder  of  common  stock;  his  dividends,  although  this  is  not 
specifically  stated  in  the  creating  clause,  would  be  cumulative, 
and  he  would  participate  in  any  general  dividends  in  excess  of 
the  preferential  dividend  already  received.  In  case  of  liquida- 
tion of  the  corporation  he  would  in  most  states  have  no  claim 
to  preference  on  the  distribution  of  assets,  but  would  come  in 
on  the  same  basis  as  the  holder  of  common  stock. 

Preference  as  to  dividends  may  be  as  to  time  and  amount, 
as  in  the  creating  clause  given,  or  as  to  profits  from  certain 


*Kent  V.  Quicksilver  Mining  Co.,  7S  N.  Y.  159  (1879);  Roberts  v.  Robert- Wicks 
Co  184  N.  Y.  257  (1906);  Equitable  Life  Assurance  Society  v.  Union  Pacific  R,  R. 
Co!*,  162  N.  Y.  App.  Div.  »i  (1Q14);  Sterling  v.  Watson  Co.,  241  Pa.  St.  105  (ipij); 
In  re  Fechheimer  Fishel  Co.,  212  Fed.  357  (1914)- 

*  I   Machen  on  Corp.,  §  549. 


82  THE   STOCK   SYSTEM 

sources,  as  where  a  preferred  stock  is  to  receive  all  the  profits 
of  a  certain  plant  or  a  particular  branch  of  the  business. 

The  usual  rate  of  dividend  on  preferred  stock  ranges  from 
5  to  7  per  cent,  though  but  few  reliable  stocks  bear  this  latter 
rate.  In  some  states  the  rate  is  limited  by  statute  to  a  maxi- 
mum of  8  per  cent. 

§  68.    Preference  as  to  Assets 

Unless  otherwise  specifically  provided,  preferred  stock 
participates  in  any  distribution  of  assets  upon  the  liquidation 
of  the  corporate  property  just  as  common  stock  does,  but  has 
no  preference.®  Some  preference  in  this  respect  is  usual,  the 
customary  arrangement  requiring  the  payment  of  the  par 
value  of  preferred  stock  with  all  arrearages  of  dividends  be- 
fore anything  is  paid  upon  the  common  stock.  In  some  states 
preferred  stock  carries  this  right  under  the  statute  law  unless 
otherwise  specifically  provided  by  the  creating  provisions,  but 
even  in  such  states  it  would  be  better  to  incorporate  this  pref- 
erence in  the  charter  to  prevent  any  mistake  or  misapprehen- 
sion as  to  the  status  of  the  stock/ 

§  69.     Cumulative  Dividends 

/        Preferred  stock  may  be  cumulative  or  non-cumulative. 

'  If  the  former,  its  dividends  are  not  payable  if  not  earned, 
but  when  profits  are  earned  its  unpaid  dividends,  past  or  pres- 
ent, are  a  first  charge  against  such  profits  and  must  be  paid 
before  the  common  stock  receives  anything.  If  preferred 
stock  is  non-cumulative,  a  passed  dividend  is  lost  and  is  not 
a  charge  against  the  company  in  any  way.  Usually  a  non- 
cumulative  preferred  stock  is  not  a  desirable  holding.  Its 
existence  is  a  standing  inducement  to  the  improper  passing 
of  dividends.     The  courts  sometimes  interfere  on  behalf  of 


"i  Machen  on  Corp.,   §565;  i  Morawetz  on  Corp..   §  461 ;  i   Cook  on  Corp.,   %  2j%. 
'  I    Machen  on   Corp.,    §  551 ;  Boardman  v.    Lake  Shore,  etc.,   R.    R.,   84  N.   Y.   15,7 
O8S1);  Elkins  V.   Camden,  etc,  Ry.  Co.,  36  N.  J.  Eq.  233  (1882). 


PREFERRED   STOCK 


83 


the  holders  of  non-cumulative  stock  where  profits  have  been 
made  and  the  directors  unjustly  refuse  to  pay  dividends. 

Non-cumulative  preferred  stock  is,  as  stated,  undesirable. 
It  is,  in  fact,  a  standing  invitation  to  the  directors,  unless 
their  ethical  standards  are  high,  to  administer  the  corporate 
finances  to  the  advantage  of  the  common  stockholder.  Profits 
that  might  very  properly  have  been  applied  to  the  preferred 
dividends  are  diverted  into  improvements  or  developments. 
These  redound  to  the  ultimate  advantage  of  the  company, 
but  meanwhile  stand  in  the  way  of  the  dividends  on  the  non- 
cumulative  preferred  stock  until  the  company  has  reached  a 
point  where  common  and  preferred  stock  dividends  are  both 
possible.  The  preferred  stockholder's  dividends  for  this  period 
are  absolutely  lost  so  far  as  he  is  concerned.  The  company 
has  profited  at  his  expense.  The  directors  might  properly  have 
paid  them  if  they  would,  but  decided  in  favor  of  the  common 
stockholder. 

If  investors  were  wise  there  would  be  no  sale  for  non- 
cumulative  stock,  for  there  is  no  legal  way  for  the  holder  of 
such  stock  to  prevent  the  directors  postponing  dividends  until 
the  common  stockholders  can  share  equally  or  even  receive 
more  than  do  the  holders  of  preferred  stock. 

It  is  to  be  noted  that  if  the  preferential  dividend  is  to 
be  non-cumulative,  this  fact  must  be  clearly  expressed  in  the 
charter  provisions  by  which  the  stock  is  authorized.  Where 
not  so  expressed,  the  courts  have  held  the  preferential  divi- 
dends to  be  cumulative  and  payable  in  full  out  of  the  first 
profits  before  anything  is  received  by  the  common  stock. 
The  cumulative  feature  of  preferred  stock  is,  however,  for 
the  sake  of  security  and  definiteness  usually  covered  by  ex- 
press provision. 

Preferred  stock  bearing  cumulative  dividends  is  sometimes 
called  "guaranteed  stock"  but  the  term  is  not  well  applied, 
being  used  with  greater  propriety  to  describe  stock  upon  which 


84  THE   STOCK  SYSTEM 

the  dividends  are  guaranteed  by  some  other  corporation.  This 
latter  form  of  stock  is  a  not  uncommon  expedient  in  arrang- 
ing the  terms  of  railroad  combinations,  and  the  employment  of 
the  term  "guaranteed  stock"  in  that  connection  is  the  more 
common  as  well  as  the  better  use. 

§  70.     Participation  in  General  Dividends 

As  already  stated,  unless  otherwise  expressly  provided, 
preferred  stock  participates  equally  with  the  common  stock 
in  all  dividends  after  both  common  and  preferred  have  re- 
ceived an  equal  dividend.  That  is,  if  the  preferred  stock  has 
received  its  preferential  dividend  of,  say,  6  per  cent  together 
with  any  cumulated  arrearages,  it  participates  no  further  in 
dividends  until  6  per  cent  has  been  paid  upon  the  common 
stock  as  well,  but  thereafter  both  classes  of  stock  stand  upon 
exactly  the  same  basis  as  to  any  further  dividends  declared 
during  that  year.  If  such  further  participation  on  the  part 
of  the  preferred  stock  is  not  desired,  it  must  be  expressly  de- 
nied.* 

Such  participation  privilege  beyond  the  preferential  divi- 
dend is  not  common.  It  is  sometimes  employed  to  advantage 
in  the  adjustment  of  interests  among  incorporating  parties, 
but  is  usually  found  only  where  the  stock  must  be  made  attrac- 
tive above  the  common,  as  in  a  speculative  corporation  where 
the  risks  are  extra-hazardous,  or  under  other  conditions  neces- 
sitating unusual  inducements  to  investors. 

Sometimes  when  preferred  stock  is  to  be  made  attractive 
beyond  the  ordinary,  it  is  limited  to  its  preferential  dividend, 
but  a  common  stock  bonus  of  equal  amount  is  given  with  it. 
This  plan  is,  however,  much  less  advantageous  for  the  other 
stockholders  than  the  use  of  participating  preferred  stock, 
as  it  involves  (i)  the  payment  of  additional  dividends  on 
stock  equal  in  amount  to  the  preferred  stock,  (2)  an  additional 

*  1.  Machen  on   Corp.,   §555;   i  Cook  on  Corp.,   1 269. 


PREFERRED    STOCK 


85 


voting  right  in  the  management,  (3)  in  event  of  liquidation 
a  double  claim  against  the  assets.   Further,  the  receipt  of  bonus 
stock  may  involve  the  holder  in  a  liability  to  creditors.' 
To  illustrate,  suppose  a  capitalization  to  be  as  follows: 

Common  stock  to  original  owners $100,000 

Preferred   6   per    cent   participating   stock    to 
purchasers   100,000 

Total  capitalization $200,000 

If  in  any  year  the  net  profits  are  $18,000  and  are  dis- 
tributed as  dividends,  the  dividend  rate  will  be  9  per  cent  and 
the  original  owners  and  the  holders  of  the  purchased  stock 
will  each  get  $9,000.  Also  in  the  absence  of  restrictions  on 
the  preferred  stock,  the  voting  power  is  equally  shared,  and 
on  dissolution  both  participate  equally  in  the  distribution  of 
assets. 

If  instead  the  organization  had  been  as  follows: 

Common  stock  to  original  owners $100,000 

Common    stock   given    as   bonus   to   preferred 

holders    ! 100,000 

Preferred  6  per  cent  non-participating  stock 

to  purchasers 100,000 

Total  capitalization $300,000 

and  the  annual  net  profits  distributed  in  dividends  were 
$18,000  as  before,  the  dividend  rate  would  be  6  per  cent  for 
all  the  stock,  and  the  original  owners  would  get  but  $6,000 
as  against  $9,000  under  the  first  arrangement.  Also  the 
preferred  stockholders  would,  in  the  absence  of  voting  re- 
strictions on  the  preferred  stock,  hold  two-thirds  of  the  voting 
stock  and  thus  control  the  corporation,  and,  if  the  corpora- 
tion were  liquidated,  would  receive  two-thirds  of  its  entire 
available  assets. 

» Holcombe   v.    Trenton   White   City   Co.,   82  Atl.    (N.    J.)    616   (191a). 


85  THE   STOCK   SYSTEM 

To  avoid  misunderstanding  when  a  participating  pre- 
ferred stock  is  issued,  a  distinct  provision  in  the  authorizing 
charter  or  by-law  clause  should  cover  such  participation. 

§  71.     Redemption  Right 

Preferred  stock  is  often  issued  with  the  proviso  that  after 
a  certain  period  and  after  specified  notice,  the  corporation 
shall  have  the  right  to  buy  in  or  redeem  its  outstanding  pre- 
ferred stock  at  some  previously  designated  price. 

Provisions  in  regard  to  the  redemptions  of  preferred  stock 
are  found  in  the  laws  of  a  number  of  states,  for  the  most  part 
referring  to  the  time  and  rate  of  redemption.  In  the  absence 
of  any  prohibition,  the  redemption  of  preferred  stock  under 
suitable  conditions  would  seem  to  be  entirely  within  the  power 
of  the  corporation,  though  a  provision  of  this  kind  w^ould  not 
be  permissible  in  a  state  where  corporations  are  forbidden 
to  acquire  their  own  stock.^°  "The  relation  of  classes  of  stock- 
holders to  each  other  and  to  the  corporation  is,  unless  governed 
by  statute,  purely  contractual."^^ 

It  is  also  to  be  noted  that  under  no  circumstances  would 
the  corporation  have  the  right  to  redeem  preferred  stock 
when  by  so  doing  it  would  impair  its  capital  stock  or  affect 
the  rights  of  creditors.^^  For  this  reason  such  redemption 
should  be  made  permissive,  not  mandatory,  as,  if  made  manda- 
tory, the  corporation  might  later  find  itself  under  contract 
obligation  to  do  an  illegal  act. 

The  redemption  right  is  sometimes  of  considerable  im- 
portance, and  should  be  retained  if  it  can  be  done  without 
injury  to  the  sale  of  the  preferred  stock.  Dividend  rates  on 
preferred  stock  are  usually  higher  than  interest  rates  on  bor- 

»oHackett  v.  North  Pac.  Ry.  Co.,  36  Misc.  (N.  Y.)  583  (1901).  In  this  case  a 
foreign  corporation  was  authorized  to  issue  preferred  stock  by  a  vote  of  a  majority 
of  stockholders.  A  condition  that  the  corporation  might  on  the  first  day  of  January 
in  any  year  prior  to   1917  retire  such  preferred  stock  at  par,  was  held  valid. 

"  Equitable  Life  Assurance  Society  v.  Union  Pacific  R,  R.  Co.,  162  App.  Div. 
(N.  Y.)  81  (1^4). 

"  Ellsworth  V.  Lyons,  181  Fed.  55  (1910). 


PREFERRED    STOCK 


87 


rowed  money,  and,  if  the  corporation  accumulates  surplus 
profits,  the  preferred  stock  may  be  redeemed  and  its  high  pre- 
ferred dividends  terminated  with  much  advantage.  If  the 
redemption  period  is  reasonably  remote,  say  five  years  or 
more,  and  the  redemption  price  is  attractive,  this  right  may 
be  provided  without  detriment  to  the  salability  of  the  stock 
afitected. 

The  redemption  price  of  preferred  stock  varies  with  the 
conditions.  Always,  as  a  prerequisite,  the  payment  of  any 
accrued  dividends  is  involved.  Frequently  the  price  is  fixed 
at  the  par  value  of  the  stock  plus  one  year's  dividend.  At 
other  times  it  is  arbitrarily  placed  at  a  figure  thought  attrac- 
tive or  fair,  as  105,  no,  or  even  more  under  some  circum- 
stances. Occasionally  the  holders  of  the  preferred  stock  will 
be  given  the  option  of  exchanging  their  stock  for  common 
stock  instead  of  taking  the  redemption  price. 

Preferred  stock  when  redeemed  is  no  longer  a  claim 
against  the  dividends  or  assets  of  the  company.  It  is,  however, 
still  a  part  of  the  capitalization  of  the  company,  and  might, 
with  the  assent  of  the  stockholders,  be  reissued. 

§  72.     Voting  Rights 

Unless  otherwise  expressly  provided,  preferred  stock- 
holders have  exactly  the  same  right  to  participate  in  corporate 
meetings  and  to  vote  upon  their  stock  as  do  the  holders  of  com- 
mon stock. ^^  Usually,  however,  this  voting  right  and  the  right 
to  participate  in  stockholders'  meetings  is  denied  the  preferred 
stock,  the  power  of  management  being  reserved  to  the  common 
stock.  In  such  case  the  provisions  by  which  the  preferred 
stock  is  created  should  state  clearly  the  fact  of  its  non-voting 
character,  and  this  fact  should  also  appear  plainly  upon  the 
face  of  the  certificate  by  which  such  preferred  stock  is  repre- 
sented.   Under  such  circumstances  the  preferred  stockholders 


"  I  Machen  on  Corp.,  §  5.70. 


gg  THE   STOCK   SYSTEM 

have  no  more  voice  in  the  management  of  the  corporation  than 
have  its  bondholders. 

Unless  prohibited  in  some  way,  it  is  entirely  within  the 
power  of  the  corporation  to  deny  the  voting  power  to  pre- 
ferred stock  before  issuance. 

"There  is  no  rule  of  public  policy  which  forbids  a  cor- 
poration and  its  stockholders  from  making  any  contract  they 
please  in  regard  to  restrictions  on  the  voting  power.  If  the 
agreement  is  made  by  unanimous  consent  it  is  legal.""  In 
California,  however,  the  statutes  provide  that  no  preference  as 
to  voting  power  may  be  granted  to  any  class  of  stock. ^^ 

A  variation  of  the  plan  of  absolute  non-representation  is 
to  provide  that  the  holders  of  preferred  stock  shall  not  vote 
so  long  as  the  preferential  dividends  are  paid  with  reasonable 
regularity,  but  that  if  such  preferential  dividends  fail,  say  for 
two  consecutive  years,  then  the  holders  of  preferred  stock 
shall  thereafter  have  the  right  to  vote. 

This  plan  has  the  appearance  of  equity.  If  those  in  charge 
of  the  corporation  cannot  manage  the  corporate  business  so  as 
to  pay  dividends  on  even  the  preferred  stock,  it  would  seem 
but  reasonable  that  the  holders  of  preferred  stock,  who  suffer 
by  this  mismanagement,  should  be  allowed  a  voice  in  its  con- 
trol. If  interest  is  not  paid  on  a  bond  issue,  foreclosure  results 
and  the  bondholders  not  infrequently  buy  in  and  conduct  the 
business.  Giving  the  preferred  stock  a  conditional  voice  in  the 
management  is  a  far  milder  application  of  the  same  principle. 

§  73.     Convertible  Stock 

In  New  Jersey  by  statutory  enactment,  corporations 
answering  to  certain  descriptive  conditions  are  allowed  to  re- 
deem  their   preferred   stock — the   holders   consenting — with 


"2  Cook  on  Corp.,  §  622b,  cited  in  State  v.  Swanger,  190  Mo.  561  (1905);  People 
ex  rel  Brown  v.  Koenig,  133  A.  D.  (N.  Y.)  756  (1909) ;  Equitable  Life  Assurance 
Society  v.    Union    Pacific   R.    R.    Co.,    162  App.    Div.    (N.   Y.)   81    (1914). 

"Film    Producers    Inc.    v.    Jordan,    154   Pac.    (Gal.)    605   (1916). 


PREFERRED   STOCK 


89 


bonds.  By  a  singular  coincidence,  the  United  States  Steel  Cor- 
poration was  found  to  be  within  the  descriptive  prescriptions, 
and,  with  the  consent  of  two-thirds  of  its  outstanding  voting 
stock,  it  offered  the  holders  of  its  7  per  cent  preferred  stock  the 
privilege  of  exchanging  such  stock  for  5  per  cent  bonds.  The 
exchange  was  entirely  optional  with  the  holders  of  the  pre- 
ferred stock,  but  the  measure  aroused  bitter  opposition  and 
litigation.    The  exchange  was  finally  upheld.^® 

In  the  absence  of  permitting  statutory  provisions,  any 
such  exchange  or  arrangement  for  such  exchange  would  be 
illegal. 

§  74.     Founders'  Shares 

In  England,  founders'  shares,  a  kind  of  preferred  stock 
which  may  be  described  as  a  privileged  deferred  stock,  are  fre- 
quently issued.  To  illustrate,  a  corporation  capitalized  at 
$300,000,  with  $100,000  of  this  as  preferred  stock  and  $200,- 
000  as  common  stock,  might  have  $25,000  of  this  common 
stock  set  aside  as  founders'  shares  with  specified  dividend 
rights  equal  perhaps  to  all  the  other  common  stock.  That  is, 
under  the  supposed  arrangement,  after  the  preferred  stock 
had  received  its  dividend,  any  further  dividends  would  be 
divided  into  two  equal  parts,  one  of  which  would  go  to  the 
ordinary  common  stock,  the  other  to  the  founders'  shares. 
Under  this  arrangement  the  $25,000  of  founders'  shares  would 
equal  $175,000  of  the  ordinary  shares  as  far  as  participation 
in  dividends  was  concerned. 

Under  such  conditions  the  founders'  shares  might  have  a 
value  many  times  in  excess  of  that  of  the  commoji  stock. 
Where  employed,  such  shares  are  usually  reserved  as  an 
emolument  for  the  promoters  of  the  enterprise,  or  as  com- 
pensation to  men  of  eminence  or  financial  repute  for  the  use  of 
their  names. 


"  Berger  v.  U.  S.  Steel  Corp.,  63  N.  J.  Eq.  506;  s.  c,  809  (i9m)- 


90 


THE   STOCK   SYSTEM 


It  is  supposed  that  under  the  New  Jersey  laws,  and  under 
the  laws  of  some  other  states,  these  founders'  shares  might  be 
legally  issued.  Some  few  companies  have  been  organized  upon 
this  basis,  but  it  does  not  appear  that  the  subject  has  ever  come 
up  for  adjudication  in  this  country,  and  it  is  not  certain  what 
view  might  be  taken  of  the  matter  by  the  courts.  Probably, 
if  accomplished  by  proper  charter  provisions  and  with  the  full 
knowledge  of  the  stockholders  generally  and  with  all  due  pub- 
licity, the  arrangement  would  stand.  As  everything  to  be 
secured  by  the  use  of  the  founders'  shares  can,  however,  be  ac- 
complished by  the  skillful  but  recognized  and  adjudicated  use 
of  common  and  preferred  stock,  it  would  hardly  seem  wise  to 
venture  on  ground  that  is,  at  the  best,  experimental  and  of 
doubtful  utility. 


CHAPTER   X 

FULL-PAID    STOCK 

§  75.    General 

Subscribers  to  stock  on  its  original  issue  must  pay  its 
par  or  nominal  value  under  penalty  of  possible  liability  to 
the  corporation  or  its  creditors  for  the  amount  necessary  to 
make  up  the  full  face  value  of  any  stock  issued  for  less. 

In  most  states  full-paid  stock  carries  no  liability,  either 
in  favor  of  the  issuing  corporation  or  of  the  creditors  of  that 
corporation.     (See  §  78.) 

§76.     Watered  Stock 

Watered  stock  is  stock  issued  without  adequate  support- 
ing values  therefor  having  come  into  the  possession  of  the 
corporation.  Many  states  explicitly  prohibit  its  issuance 
by  statute.  Where  not  prohibited,  watered  stock  may  be 
created  by  the  issue  of  ** full-paid"  stock  for  cash  at  less  than  its 
par  value ;  by  its  issuance  as  a  stock  dividend  without  sufficient 
increase  of  the  corporate  property  to  support  the  issue;  by  its 
issuance  as  a  bonus  with  preferred  stock  or  bonds ;  or,  as  is  the 
method  in  the  great  majority  of  cases,  by  its  issuance  for 
property  or  services  at  an  overvaluation. 

The  most  obvious  form  of  watered  stock  is  the  stock 
dividend  occasionally  issued  by  the  large  public  utility  cor- 
porations where  there  is  no  pretense  of  any  increased  value 
in  the  property  behind  the  stock,  the  issue  being  justified  only 
by  an  earning  capacity  sufficient  to  pay  dividends  upon  the 
increased  capitalization.  If  the  corporation  were  forced  into 
liquidation,  the  stock  would  receive  only  a  fraction  of  its  face 

91 


92  THE   STOCK  SYSTEM 

value.  Such  a  stock  dividend  must  be  distinguished  from  a 
stock  dividend  paid  in  lieu  of  cash  dividends  of  equal  amount, 
where  the  reserved  cash  or  equivalent  property  is  added  to 
the  working  capital  of  the  company.  In  such  case  the  issued 
stock  represents  actually  increased  values,  capable  of  realiza- 
tion in  event  of  the  liquidation  of  the  company. 

The  most  common  form  of  watered  stock  is  stock  issued 
in  the  purchase  of  property  at  an  overvaluation.  Such  stock 
is  nominally  full-paid,  and  in  some  cases  by  the  subsequent 
prosperity  of  the  corporation  the  anticipations  of  its  pro- 
moters are  realized  and  the  stock  is  removed  from  the  cate- 
gory of  watered  stock.  In  the  majority  of  cases,  however, 
the  corporation  does  not  meet  the  expectations  of  its  organ- 
izers, and  the  issued  stock  is  left  with  but  little  support.  In 
such  case,  if  the  undertaking  is  of  sufficient  value  in  actual 
property  or  in  possible  profits  to  justify  the  step,  a  reorganiza- 
tion takes  place,  the  capital  stock  is  greatly  reduced,  thereby 
"squeezing"  the  water  out  of  it,  and  the  corporation  is  placed 
on  a  decreased,  but  usually  much  sounder,  basis. 

§  77.     Legal  Status  of  Watered  Stock 

Stock  issued  for  less  than  its  full  face  value  without 
agreement  between  the  parties  thereto  as  to  the  nature  of 
such  stock,  is  partly  paid  stock,  and  the  purchaser  is  liable 
to  the  corporation,  or  in  event  of  the  insolvency  of  the  cor- 
poration to  its  creditors,  for  the  amount  necessary  to  make 
up  the  full  face  value  of  such  stock.  If,  however,  it  is  agreed 
between  the  purchaser  and  the  corporation  that  the  price  paid 
shall  be  in  full  settlement  of  the  claims  of  the  corporation 
against  such  stock,  then  as  between  these  parties  the  stock  is 
full-paid,  and  in  the  absence  of  fraud  the  holder  is  under  no 
liability  to  the  corporation.^ 

»i  Cook  on  Corp.,   §§30,  4^;  Scovill  v.  Thayer,  105  U.   S,   143  (1881) ;  Christensen 
V.  Eno,  106  N.  Y.  97  (1887);  bouthworth  v.   Morgan.  205  N.  \.  293  (1913). 


FULL-PAID    STOCK 


93 


This  is  true  as  to  the  corporation  but  not  as  to  its  sub- 
sequent creditors  unless  by  agreement  of  these  latter.  In 
event  of  the  insolvency  of  the  corporation,  these  creditors 
might  proceed  against  the  original  purchasers  of  any  watered 
or  partly  paid  stock  so  long  as  such  stock  remained  in  their 
hands,  and  collect  from  them  the  amount  necessary  to  render 
their  stock  full-paid.^ 

This  possible  liability  follows  the  unpaid  stock  into  the 
hands  of  transferees  purchasing  such  stock  with  a  knowledge 
of  its  character,  but  does  not  follow  it  into  the  hands  of  an 
innocent  purchaser  for  value.     ( See  §  79. ) 

It  is  to  be  noted  that  the  general  doctrine  as  stated 
requires  modification  in  those  cases  where  the  board  of  direc- 
tors of  a  corporation  have  issued  stock  for  property  or  ser- 
vices, in  good  faith  and  without  fraud,  and  later  develop- 
ments prove  the  consideration  to  have  been — or  to  be — worth 
less  than  the  face  value  of  the  stock.^  In  most  states  of  the 
Union,  if  it  can  be  shown  that  the  directors  exercised  proper 
care  in  the  investigation  and  acceptance  of  the  property,  the 
courts  refuse  to  hold  the  recipients  of  the  stock  liable  on  the 
ground  of  failure  or  insufficiency  of  the  consideration.* 

§  78.    Legal  Status  of  Full-Paid  Stock 

Full-paid  stock  carries  no  liability  of  any  kind,  either  to 
the  corporation  or  its  creditors,  save  in  those  few  states  where 
by  statute  special  liabilities  have  been  created.  This  freedom 
from  liability,  no  matter  what  the  vicissitudes  of  the  corpora- 
tion, gives  to  stock  its  desirability  as  a  form  of  investment. 
As  this  feature  pertains  only  to  full-paid  stock,  it  is  a  great 
object  in  the  organization  of  a  new  corporation  to  render  its 
stock  full-paid. 


2  Cohen   v.    Toy   Gun   Mfg.    Co.,   172   111.   App.   330   (1912);    Gilson   v.   Appleby,   83 
N.   J.    L.   400  (191 1). 

3  Douglass   V.    Ireland,   73   N.    Y.    100    (1876);    Hayes  v.    Iron    Co.,    165   Pa.    St.   489 
(T895,). 

*  Holcombe  v.   Trenton  White   City   Co.,  82  Atl.    (N.  J.)  618  (.1912);  Whitloek  t. 
Alexander,   160   N.    C.   465   (1912). 


94  THE   STOCK   SYSTEM 

Where  stock  is  issued  at  par  for  cash,  which  with  finan- 
cial institutions  is  usually  a  matter  of  statutory  obligation, 
or  for  cash  and  substantial  property  equalling  the  actual 
face  value  of  the  stock  as  in  the  case  of  solid  business  corpo- 
rations, the  question  does  not  arise.  The  ordinary  corpora- 
tion, however,  cannot  as  a  rule  sell  its  stock  at  par,  particularly 
when  it  is  organized  for  the  development  of  some  new  or 
speculative  enterprise.  To  issue  such  stock  direct  for  less 
than  par  would  leave  the  purchasers — if  purchasers  could 
be  found — liable  for  the  difference.  Various  expedients  are 
then  utilized  to  render  this  stock  full-paid  before  it  is  sold 
to  the  actual  purchasers  for  cash,  and  the  methods  adopted 
to  secure  this  end  have  given  rise  to  most,  if  not  all,  of  the 
litigation  relating  to  the  full  payment  of  stock.  (See  Chapter 
XI,  "Treasury  Stock.") 

§  79.     Certificates  for  Full-Paid  Stock 

When  stock  is  full-paid  the  securities  by  which  it  is  rep- 
resented usually  bear  upon  their  face  the  words  "Full-Paid  and 
Non-Assessable."  There  is  no  legal  requirement  that  the  cer- 
tificates shall  be  so  inscribed,  but  if  they  were  not  the  pur- 
chasers would — and  very  properly — be  suspicious  of  the  stock. 
The  direct  and  legitimate  inference  from  the  omission  would 
be  that  such  stock  was  not  full-paid  and  non-assessable  and 
might  carry  latent  liabilities.  If  stock  is  not  full-paid,  the 
label  will  not  shield  stockholders  who  know  the  facts. 

On  the  other  hand,  where  certificates  are  marked  "Full 
Paid  and  Non-Assessable,"  such  stock  may  be  bought  in  the 
open  market  with  full  confidence  that  its  purchase  involves 
no  unknown  liabilities.  Even  should  it  later  prove  to  have 
been  but  partly  paid,  or  not  paid  at  all,  the  innocent  purchaser 
for  value  could  not  be  held  liable  on  that  account.  He  pur- 
chased on  the  faith  of  the  unquestioned  statement  on  the  stock 
certificate  that  such  stock  was  full-paid,  and,  as  far  as  he  is 


FULL-PAID    STOCK  ^^ 

concerned,  the  stock  will  be  held  to  bear  that  character.^  If, 
however,  the  purchaser  knew  that  the  stock  had  not  been  hon- 
estly full-paid,  he  would,  as  already  stated  (§  'j'j^,  take  with 
notice  and  might  be  held  liable  for  any  deficiency.^  Where 
the  statute  requires  a  certificate  of  full  payment  to  be  filed  in 
a  public  office,  the  fact  that  such  certificate  has  not  been  filed 
has  been  held  to  be  sufficient  to  give  a  purchaser  notice  that  the 
stock  was  not  fully  paid/ 

The  impressive  word  "Non-Assessable"  merely  indicates 
that  the  corporation  has  either  received  full  payment  of  the 
stock  in  question,  or  otherwise  that  it  has  relinquished  any 
claim  it  might  have  on  such  stock  for  further  payments  or 
assessments  of  any  kind.  Full-paid  stock  is  non-assessable 
under  any  circumstances  except  in  California  and  a  limited 
number  of  other  states  where  the  statutes  permit  the  corpora- 
tion to  levy  assessments. 

In  some  few  states  certificates  representing  stock  issued 
for  property  must  bear  the  legend  "Issued  for  Property'*  or 
some  equivalent  statement.  Elsewhere  this  is  neither  neces- 
sary nor  desirable.  Such  stock  is  of  no  different  nature  or 
legal  status  from  any  other  stock,  and  to  inscribe  it  in  the 
manner  indicated  conveys  the  impression  that  some  difference 
actually  exists. 


''Cook  on  Corp.,  §§50,  257,  note  4;  Sprague  v.  National  Bank  of  Amer.,  172  111. 
149   (1898);    French    v.    Harding,   83   Atl.    (Pa.)    586    (1912). 

«  Cook  on  Corp.,  §49;  2  Clark  &  Marshall  on  Corp.,  §  401k;  Wallace  v.  Carpenter, 
etc.,  Co.,  70  Minn.  321  (1897);  Coleman  v.  Howe,  154  111.  458  (1895);  Gillett  v. 
Chicago   Title   &   Trust    Co.,    230    111.    373    (1907)- 

'White,  Corbin  &  Co.  v.  Jones,  167  N.   Y.   158  (1901). 


CHAPTER   XI 

TREASURY  STOCK 

§  80.     Definition 

The  term  "Treasury  Stock"  is  employed  very  loosely  by 
business  men  and  accountants  to  describe  unissued  stock.  It 
would  be  better  to  use  the  term,  to  designate  the  issued  and 
outstanding  stock  of  the  company  that  has  been  donated  to  or 
purchased  by  the  corporation  and  which  is  held  subject  to  dis- 
posal by  the  directors.  Such  stock  is  properly  treasury  stock, 
is  the  property  of  the  company,  and  technically  at  least,  is 
an  asset  on  the  books  of  the  company.^ 

To  style  unissued  stock  "treasury  stock"  is  a  misnomer. 
Unissued  stock  is  merely  the  privilege  of  creating  a  liability. 
It  is  not  in  any  sense  of  the  word  an  asset.  For  $20  the  State 
of  Arizona  will  charter  a  corporation  and  authorize  it  to  issue 
stock  to  the  face  value  of  $25,000,000  or  more.  Such  a  com- 
pany on  organization  would  have  an  over-plentiful  supply  of 
unissued  stock,  but  no  assets  whatever.  The  absurdity  of  re- 
garding its  unissued  stock  as  an  asset  is  obvious.     (See  §  61.) 

Stock  that  has  been  once  legally  issued  for  full,  honest 
value,  however,  is  of  a  very  different  nature.  It  is  then  full- 
paid  stock  and  represents  a  certain  interest  in  the  corporate 
property.  If  any  of  it  comes  back  into  the  possession  of  the 
company  it  is  still  "full-paid  stock"  and  is  then  with  some 
logical  correctness  considered  an  asset.  Such  stock  is  prop- 
erly classified  as  treasury  stock  and  may  be  sold  below  par 
to  raise  funds  for  the  operations  of  the  company,  may  be  given 
away  as  a  bonus  with  preferred  stock  or  bonds,  or  be  other- 


^  Montgomery    on   Auditing,    pp.    133,    i34- 

96 


TREASURY   STOCK  ^7 

wise  used  without  involving  the  recipient  in  any  HabiHty  to 
creditors  of  the  corporation.^ 

In  case  such  treasury  stock  were  originally  issued  for 
property  at  an  overvaluation,  an  innocent  purchaser  for  value 
cannot  be  held  liable,  but  a  purchaser  with  knowledge  of  the 
overvaluation  might  be.^ 

§  81.     Origin 

If  a  corporation  were  organized  upon  a  strictly  cash  basis, 
each  subscriber  paying  the  par  value  for  his  stock,  it  would 
have  no  treasury  stock  at  the  time  of  organization.  Later 
should  a  portion  of  this  issued  stock  come  back  into  the  pos- 
session of  the  company  in  settlement  of  some  debt  or  through 
other  negotiation,  such  returned  stock  would  be  treasury  stock 
and  from  the  bookkeeping  standpoint  an  asset  of  the  company. 

When,  however,  as  is  so  frequently  the  case,  a  corporation 
is  organized  under  the  usual  plan  to  exploit  some  mine,  in- 
vention, or  other  enterprise,  or  to  make  a  combination  of  ex- 
isting corporations,  it  issues  all  or  a  large  portion  of  its  stock 
in  payment  for  the  property  assigned  to  the  corporation.  This 
stock  is  thereby  rendered  nominally  full-paid.  Then  by  agree- 
ment, or  by  understanding,  the  recipient  of  this  stock  assigns 
back  to  the  corporation,  or  to  some  trustee  for  the  corpora- 
tion, a  proportion  of  this  full-paid  stock  to  be  used  for  com- 
pany purposes.  This  is  treasury  stock  of  the  company  and 
in  the  present  day  it  is  thus,  as  a  general  rule,  that  treasury 
stock  is  obtained.  Such  stock  is  usually  a  clear  donation,  the 
disposition  to  be  made  of  the  stock  being  sometimes  prescribed, 
but  generally  left  to  the  discretion  of  the  board  of  directors. 
Such  procedure  is  not  always  disapproved  by  the  courts. 


*i  Cook  on  Corp.,  §§46-50;  i  Morawetz  on  Corp.,  §306;  2  Clark  &  Marshall  on 
Corp.,  §  59oe;  i  Machen  on  Corp.,  §785;  Mosher  v.  Sinnott,  20  Colo.  App.  454  (1905); 
Lake  Superior  Iron  Co,  v.  Drexel,  90  N.  Y  87  (1882) ;  Davis  Bros.  v.  Chemical  Co., 
101  Ala.  127  (1892) ;  Insurance  Press  v.  Montauk,  etc.,  Co.,  103  A.  D.  (N.  Y.)  47B 
(:905)- 

3  Allkig  V.  Wenzel,  133  111.  264  (1890) ;  Coleman  v.  Howe,  154  III.  458  (18951)  J 
Berry  v.    Rood,   168  Mo.   316   (1901). 


98  THE   STOCK   SYSTEM 

"The  individual  defendants  then  transferred  back  to  the 
company  a  certain  amount  of  stock  which  was  to  become 
the  property  of  the  company,  and  to  be  disposed  of  by  it  for 
its  own  benefit.  Such  a  condition  is  not  unusual  in  companies 
of  this  character.  In  order  to  make  its  stock  of  any  value,  it 
was  essential  that  the  company  should  have  a  working  capital 
in  addition  to  the  patents,  and  the  persons  who  had  exchanged 
their  patents  for  the  stock  of  the  company  were  willing  to  give 
to  the  company  a  portion  of  their  stock  so  that  the  working 
capital  could  be  secured  and  thus  give  value  to  the  remainder 
of  the  stock."^ 

It  is  to  be  noted,  however,  that  in  harmony  with  the 
present  general  trend  towards  stricter  regulation  of  corpora- 
tions, the  courts  are  scrutinizing  "full-paid"  stock  of  this 
character  much  more  carefully  than  heretofore.  This  is  par- 
ticularly true  in  New  Jersey,  where  it  was  formerly  supposed 
that  "in  the  absence  of  actual  fraud  in  the  transaction,  the 
judgment  of  the  directors  as  to  the  value  of  the  property  pur- 
chased shall  be  conclusive"^ — and  this  with  but  little  regard 
as  to  how  this  judgment  was  reached.  Recent  decisions  have, 
however,  rudely  disturbed  this  pleasing  supposition.  It  is 
now  held  that  the  directors'  judgment  must  be  based  on  some- 
thing more  tangible  than  promoters'  statements  or  vague  sup- 
positions. As  laid  down  by  the  court  in  a  recent  case,  "it  was 
their  duty  to  have  acted  as  an  independent  board  of  directors, 
with  full  knowledge,  would  have  acted,  namely,  to  have  made 
a  careful  inventory  and  appraisement  of  all  property  to  be 
purchased  with  stock  or  for  cash,  and  to  have  either  issued 
stock  or  paid  cash,  measure  for  measure,  value  for  value. 
This  they  neglected  to  do,  with  the  result  that  those  whom 
they  sought  to  protect  are  not  protected,  themselves  included."^ 


*  Justice  Ingraham  in   Insurance  Press  v.   Wire  Co.,   log  A.   D.    (N.   Y.)   472,  476 
(''905)- 

^  P.    L.    (N.   J.)    1893,   p.   444,   as  amended   by  Laws   of   1896,  p.    2941- 
•Holcombe  v.  Trenton  White  City  Co.,  82  Atl.   (N.  J.)  618  (1912). 


TREASURY    STOCK  op 

In  this  case,  treasury  stock  supposedly  full-paid  by  prop- 
erty in  exchange  for  which  it  was  originally  issued,  was  held 
not  to  have  been  fully  paid  thereby,  and  parties  to  whom  it  was 
subsequently  issued  as  treasury  stock  were  held  liable  to  the 
company's  creditors  for  the  unpaid  balance. 

§82.     Transfers  to  Corporation 

When  stock  Is  donated  or  otherwise  transferred  to  the 
corporation,  the  certificates  should  not  be  assigned  to  the 
treasurer  by  name,  as  to  "John  Wilson,  Treasurer,"  as  at  a 
subsequent  election  the  position  of  treasurer  may  be  filled  by 
some  other  person  and  the  too  definite  indorsement  may  then 
cause  trouble.  Such  stock  is  better  indorsed  to  the  company 
itself,  as  "The  Caswell  Company,"  or  to  its  treasurer,  as 
"Treasurer  of  The  Caswell  Company." 

A  plan  that  is  sometimes  pursued  when  stock  is  thus 
turned  over  for  the  benefit  of  the  company  is  to  assign  it  to 
trustees  to  hold  and  sell  such  stock  for  the  benefit  of  the  com- 
pany, either  at  their  own  discretion  or  under  the  superin- 
tendence of  the  directors,  the  funds  so  received  being  paid 
over  to  the  treasurer  of  the  corporation.  This  plan  relieves  the 
corporation  of  all  responsibility  as  to  the  details  of  the  matter, 
the  transaction  not  appearing  on  the  company's  books  until  the 
money  from  the  sale  of  the  stock  is  turned  over.' 

When  certificates  representing  treasury  stock  are  received 
by  the  corporation,  they  should  bear  the  proper  indorsements, 
and  are  then  usually  turned  over  to  the  secretary.  This 
official  should  enter  the  transfer  in  the  stock  book,  cancel  the 
old  certificates  and  return  them  to  the  stock  certificate  book, 
and,  if  desired,  issue  new  certificates  in  the  name  of  the  cor- 
poration or  of  the  official  by  whom  the  stock  is  to  be  held. 
It  is  to  be  noted  that  new  certificates  need  not  necessarily  be 
issued  at  all  until  sales  of  treasury  stock  are  made,  when  the 


'  Wood  V.    Sloman,    150   Mich.    177   (1907). 


lOO  THE   STOCK   SYSTEM 

certificates  representing  stock  sold  might  be  issued  directly  to 
the  purchasing  party.  In  such  case,  until  the  time  of  sale, 
the  stock  book,  in  connection  with  the  cancelled  certificates  of 
the  stock  certificate  book,  is  sufficient  evidence  of  the  status 
and  ownership  of  such  treasury  stock. 

« 
§  83.     Transfers  from  Corporation 

When  treasury  stock  is  sold  the  formalities  are  simple. 
The  sale  being  duly  authorized  by  the  directors,  the  treas- 
urer would,  if  the  stock  were  held  by  him  and  the  original 
certificates  had  been  cancelled  without  reissue,  merely  give 
the  purchaser  an  order  for  the  required  certificates,  or  instruct 
the  secretary  in  writing  to  issue  such  new  certificates.  If 
the  original  had  been  cancelled  and  new  certificates  issued  to 
the  treasurer,  this  latter  official  would  merely  assign  one  of 
his  certificates,  if  of  the  right  denomination.  If  otherwise 
he  would  have  one  broken  up,  the  proper  number  of  shares 
being  issued  therefrom  to  the  new  purchaser  and  the  unsold 
remainder  being  issued  to  the  treasurer.  If  the  certificates 
had  been  held  in  the  name  of  the  corporation,  the  treasurer 
or  such  other  ofificial  or  officials  as  were  designated  by  the 
board  would  make  the  proper  assignments. 

§  84.     Legal  Status  of  Treasury  Stock 

When  its  own  stock  is  returned  to  and  is  held  by  the 
corporation,  or  by  trustees  or  by  its  own  officers  for  the 
corporation,  such  stock  is  not  unissued  stock,  nor  do  the 
stockholders  as  such  have  any  subscription  or  participation 
rights  when  it  is  reissued.^  So  long  as  such  stock  is  held  by 
the  corporation,  it  is  inert  and  can  neither  vote  nor  partici- 
pate in  dividends.^     Should  the  stock  be  voted,  such  action 

» Crosby  v.   Stratton,    17   Colo.    App.   212   (1902) ;    Hartley  v.   Pioneer   Iron  Works, 

^  '  »j  Qari  &  Marshall  on  Corp.,  §653!;  Vail  v.  Hamilton.  85  N.  Y.  453  (1881); 
Am.,  etc.,  Co.  v.  Haven,  loi.  Mass.  398  (1869);  O'Connor  v.  Int.  Silver  Co.,  68  N.  J. 
Eq.  67  (1904). 


TREASURY    STOCK'    "  ' ' '  ^  ^  ^   ^r  V\^\y'^  > 

would  be  illegal  and  any  action  or  election  decided  by  such 
vote  of  treasury  stock  would  be  illegal  and  might  be  set  aside. 
If  dividends  should  be  declared  and  paid  upon  such  stock, 
the  action  would  be  unauthorized  and  also  meaningless  as  the 
money  so  paid  would  come  directly  back  into  the  treasury  of 
the  corporation. 

§  85.     Stock  of  Other  Corporations  Held  in  Treasury 

It  is  to  be  noted  that  the  comments  of  the  preceding 
section  do  not  in  any  way  apply  to  stock  of  other  corpora- 
tions which  may  be  owned  and  held  in  the  treasury  of  any 
particular  corporation.  Such  stock  is  personal  property  of  the 
corporation,  is  liable  to  taxation  as  such,  and  all  its  cor- 
porate rights  and  privileges  are  maintained  in  full  vigor.  It 
participates  to  the  full  in  any  dividends  declared  by  the  cor- 
poration from  which  it  issued,  and  is  entitled  to  full  represen- 
tation and  voting  rights  at  any  stockholders*  meeting  of  that 
corporation.  Such  stock  would  be  voted,  either  in  person  or 
by  proxy,  by  the  trustee  or  official  in  whose  name  it  was  held, 
or  if  held  in  the  name  of  the  corporation  by  such  person  as 
was  formally  designated  thereto  by  the  corporation.  Such 
vote  would  be  cast  under  the  general  instructions  of  the  board 
of  directors  of  the  holding  corporation,  but,  unless  matters  of 
much  importance  were  to  be  considered,  no  detailed  instruc- 
tions would  be  given,  all  this  being  left  to  the  discretion  of 
the  person  w^ho  represented  the  corporation.  If  matters  of 
much  importance  were  to  be  considered,  the  representative 
might  be  instructed  with  precision  as  to  his  position  and  his 
vote. 

It  is  to  be  noted,  however,  that  a  corporation  cannot 
legally  hold  the  stock  of  another  corporation  unless  specifi- 
cally authorized  by  statute,  as  in  Delaware,  or  by  charter 
provision  allowable  under  the  statutes,  as  in  New  York." 

»» Dunbar   v.    Amer.    Tel.    Co.,    338    III.    456    (1909). 


Part  IV — Corporate  Control 


CHAPTER   XII 

STOCKHOLDERS 

§  86.     General 

"The  shareholders  are  persons  who  are  interested  In  the 
operation  of  the  corporate  property  and  franchises,  and  their 
shares  actually  represent  undivided  interests  in  the  corporate 
enterprises.  The  corporation  has  the  legal  title  to  all  the 
properties  acquired  and  appurtenant ;  but  it  holds  them  for  the 
pecuniary  benefit  of  those  persons  who  hold  the  capital  stock. 
They  appoint  the  persons  to  manage  its  affairs,  they  have 
the  right  to  share  in  surplus  earnings  and,  after  dissolution, 
they  have  the  right  to  have  the  assets  reduced  to  money  and 
to  have  them  ratably  distributed.  Each  share  represents  a 
distinct  interest  in  the  whole  of  the  corporate  property."^ 

In  the  active  affairs  of  the  corporation  the  stockholders 
occupy  a  position  of  minor  importance.  They  own  the  stock 
of  the  corporation,  and,  through  that  ownership,  the  corpo- 
ration itself  with  all  its  belongings.  Their  control  of  the 
organization  and  their  management  of  its  affairs  is,  however, 
indirect  and  somewhat  removed.  The  profits  of  the  business 
belong  to  them  but  its  actual  management  and  the  general 
control  of  the  corporation  are  in  the  hands  of  the  directors, 
with  whom  the  stockholders,  either  individually  or  collec- 
tively, cannot  directly  interfere. 

"The  functions  of  stockholders  are  exceedingly  limited. 

*/n  re  Bronson,   150  N.   Y.   i    (1896). 

102 


STOCKHOLDERS  103 

The  theory  of  a  corporation  is  that  stockholders  shall  have 
all  the  profits,  but  shall  turn  over  the  complete  management 
of  the  enterprise  to  their  representatives  and  agents,  called 
directors.  Accordingly  there  is  little  for  the  stockholders 
to  do  beyond  electing  directors,  making  by-laws,  increasing 
or  decreasing  the  capital  stock,  authorizing  amendments  to 
the  charter,  and  dissolving  the  corporation."^ 

§  87.     Functions 

As  already  intimated,  the  functions  of  the  stockholders 
are  few  and  simple.  They  assemble  once  a  year  in  annual 
meeting  to  listen  to  reports,  elect  directors,  and  discuss  the 
general  affairs  of  the  company.  On  rare  occasions  they  are 
assembled  for  particular  action  in  special  meeting.  If  the 
charter  is  to  be  amended,  they  are  usually  required  to  act. 
If  all  the  assets  of  the  corporation  are  to  be  sold,  they  must 
generally  be  called  upon  to  sanction  the  proceeding.  In  some 
states  their  consent  is  required  to  validate  corporate  mort- 
gages. They  would  act  on  any  proposed  liquidation  of  the 
corporation.  By  charter  provisions,  their  consent  may  be 
necessary  to  other  proposed  action.  One  other  most  import- 
ant function  pertains  to  the  stockholders:  the  right  to  make, 
amend,  and  repeal  the  by-laws. 

The  active  connection  of  the  stockholder  with  his  corpo- 
ration is,  under  normal  conditions,  limited  to  the  functions 
specified.  The  further  control  and  direction  of  the  corporate 
organization  and  its  property  and  business  are  left  entirely  to 
the  directors  he  has  elected. 

§  88.     Rights 

The  rights  of  stockholders  discussed  in  the  present 
chapter  are  those  general  rights  which  are  incident  to  the 
ownership  of  common  stock  in  a   stock  corporation.     The 


3   Cook   on   Corp.,   §708;    see  also    §71 


I04  CORPORATE   CONTROL 

holders  of  preferred  stock  have  all  these  same  rights — in 
addition  to  their  special  rights — unless  denied,  varied,  or 
restricted  by  the  terms  of  issue. 

Every  stockholder  has  the  right  to  transfer  stock  freely, 
to  have  his  name  appear  as  that  of  a  stockholder  upon  the 
stock  books  of  the  company,  and,  when  his  stock  is  full-paid, 
to  have  a  stock  certificate.  In  addition,  the  ordinary  indi- 
vidual rights  of  a  holder  of  stock  are: 

1.  To  be  notified  of  and  participate  in  all  stockholders' 

meetings  in  person  or  by  proxy,  and  usually  for 
each  share  of  stock  standing  in  his  name  upon  the 
books  of  the  corporation  to  cast  one  vote  at  any 
election  of  directors  or  upon  any  question  that  may 
come  before  such  meeting. 

2.  To   share,    in   proportion   to   the   amount   of   stock 

ov^ned,  in  all  dividends  declared  on  the  common 
stock,  and  to  subscribe  in  like  proportion  for  any 
increase  of  the  capital  stock. 

3.  In  event  of  the  dissolution  of  the  corporation,  to 

share  in  proportion  to  the  amount  of  stock  owned 
in  any  assets  remaining  after  the  corporate  debts 
and  obligations  have  been  paid. 

4.  To  inspect  the  corporate  books  and  accounts. 

These  rights  are  discussed  in  detail  in  the  sections  which 
follow. 

§  89.     (i)  Notice  of  Meetings  and  Voting 

As  a  matter  of  common  or  statutory  law  the  stockholder 
is  entitled  to  due  notice  of  all  stockholders'  meetings.  If  the 
time  of  the  annual  meeting  is  specified  in  the  by-laws,  this 
in  itself  is  presumed  to  be  notice  to  the  stockholder,  and  the 
fact  that  he  does  not  receive  a  personal  or  mail  notice  and 
is  for  this  reason  not  present,  does  not  affect  the  validity  of 


STOCKHOLDERS  I05 

such  meeting.  But  where,  as  in  New  York,  the  statute  re- 
quires publication  of  the  notice  of  the  annual  meeting,  or 
where  the  by-laws  provide  how  notice  shall  be  given  the 
statute  or  the  by-laws  must  be  complied  with  unless  waived 
by  all  of  the  stockholders. 

Unless  expressly  denied  in  some  way,  every  stock- 
holder, whether  his  stock  be  common,  preferred,  or  special, 
has  the  right  to  participate  in  and  vote  at  all  meetings  of 
stockholders.  Usually  he  is  entitled  to  cast  one  vote  on 
all  matters  passed  upon  at  stockholders'  meetings  for  each 
share  of  stock  standing  in  his  name  upon  the  books  of  the 
corporation — a  right  secured  to  him  in  a  majority  of  the 
states  by  express  statute  provision.  In  other  states  the  right, 
if  desired,  should  be  definitely  set  forth  and  secured  by  proper 
provision  in  the  charter  or  by-laws.  If  this  is  not  done,  the 
common  law  prevails,  under  which  every  stockholder  is  en- 
titled to  one  vote  on  all  matters  passed  upon  by  the  stock- 
holders, regardless  of  the  amount  of  stock  he  holds.^ 

If  the  statutes  make  no  provision  as  to  voting,  the  matter 
may  be  regulated  by  either  charter  or  by-laws.  In  some 
few  states,  as  in  Washington  and  Maine,  the  statutes  ex- 
pressly authorize  such  regulation  by  the  by-laws.  In  others, 
as  in  Connecticut,  Delaware,  New  Jersey,  and  Nevada,  the 
statutes  provide  the  method  th^-t  shall  be  followed  in  voting 
unless  otherwise  prescribed  by  charter  or  by-laws.  In  these 
states  it  is  possible  to  deprive  entirely  certain  classes  of  stock 
of  the  voting  power.  It  is  not  unusual  to  provide  that  pre- 
ferred stock  shall  have  no  vote  where  the  holders  of  the  com- 
mon stock  are  the  active  stockholders  and  the  preferred  stock 
represents  investments  by  outsiders.  In  California  the  statute 
forbids  any  such  denial  of  voting  power. 

The  statutes  usually  prescribe  that  voting  at  elections 
of  directors  shall  be  by  ballot.     Where  no  special  method  of 

2  Taylor   v.    Griswold,    14    N,    J.    L.    222    (1834). 


Io6  CORPORATE   CONTROL 

voting  is  prescribed  by  statutes,  charter,  or  by-laws,  it  may 
be  by  call  of  roll,  by  ballot,  or  by  any  other  method  that  will 
properly  and  legally  indicate  the  sense  of  the  meeting.  If 
all  are  agreed,  it  is  always  permissible  to  instruct  the  secre- 
tary to  cast  the  single  ballot  of  the  meeting  for  the  election 
of  specified  candidates  for  directors,  or  for  or  against  any 
other  measure  properly  before  the  meeting. 

As  between  the  corporation  and  its  members,  the  right 
to  vote  and  usually  also  the  number  of  votes  a  stockholder 
is  entitled  to  cast  is  determined  by  the  stock  books  of  the 
corporation.*  The  possession  or  non-possession  of  a  stock 
certificate  is  immaterial. 

The  right  to  vote  by  proxy  is  generally  given  by  express 
provision  of  either  the  statutes  or  by-laws,  though  in  some 
states  the  right  is  secured  by  constitutional  provision.  It 
did  not  exist  at  common  law.^ 

Trustees  may  vote  upon  the  stock  held  in  their  names  as 
trustees.  An  executor  or  administrator  may  vote  upon  the 
stock  belonging  to  the  estate  even  though  standing  in  the 
name  of  the  deceased  party.  In  the  absence  of  disagree- 
ment, any  partner  may  vote  stock  standing  in  the  partner- 
ship name.  A  corporation  holding  stock  of  another  corpora- 
tion may  vote  such  stock  through  duly  authorized  agents. 
A  receiver  usually  votes  stock  in  his  possession.  When  stock 
is  held  jointly  or  in  common,  as  in  the  case  of  a  partnership  or 
where  there  are  two  or  more  trustees  or  executors,  all  must 
agree  on  the  vote  or  otherwise  it  will  be  lost.^ 

§  go.     (2)  Dividends  and  Participation  Rights 

Save  when  affected  by  the  issue'  of  some  preferred  or 
other  special  stock,  each  stockholder  has  the  right  to  share 


*  Commonwealth  v.    Dalzell,   153  Pa.    St.   217  (1893)  I   State  v.    Ferris,  42  Conn.   560 
(1875);  In  re  Argus  Printing  Co.,  v  N.  D.  434  (1891). 

*  Taylor  v.    Griswold,    14  N.    J.    L.   222   (1834) ;    Philips  v.    Wickham,   i    Paige   (N. 
Y.)    590    (1829) ;    Commonwealth   v.    Bringhurst,    103    Pa.    St.    134    (188^). 

*  Tunis  V.   Hestonville,  etc.,   Co.,   149  Pa.   St.   70   (1892). 


STOCKHOLDERS       •  107 

in  dividends  with  the  other  stockholders  of  his  corporation 
proportionately  to  the  number  of  shares  of  stock  he  holds, 
and  there  must  be  no  discrimination  of  any  kind  in  the  decla- 
ration or  the  payment  of  these  dividends. 

Holders  of  preferred  stock,  unless  otherwise  expressly 
provided,  are  entitled  in  any  year  to  payment  of  their  pre- 
ferred dividends  before  any  dividends  are  paid  the  common 
stock,  and  thereafter,  as  soon  as  the  common  stock  has  re- 
ceived an  equal  dividend,  to  participate  equally  with  the  com- 
mon stock  in  any  further  dividends  declared  in  that  year/ 
Unless  otherwise  provided,  dividends  on  preferred  stock  are 
cumulative,  and  current  dividends  on  preferred  stock  and  all 
arrears  must  be  paid  before  dividends  may  be  paid  on  the 
common  stock.^ 

If  the  capital  stock  of  a  corporation  is  increased,  each 
stockholder  has  the  right  to  subscribe  for  the  new  stock 
proportionately  to  his  holding  of  the  old  outstanding  stock.^ 
Thus  if  he  holds  10  per  cent  of  the  outstanding  stock  and 
the  capital  stock  is  increased,  he  has  the  privilege  of  sub- 
scribing for  10  per  cent  of  the  new  stock.  This  rule  applies 
to  any  actual  increase  of  stock,  but  not  to  a  sale  of  treasury 
stock,  nor  usually  to  stock  which  is  part  of  the  original 
capitalization  but  which  has  not  yet  been  issued.^"  If,  how- 
ever, this  unissued  stock  has  been  held  for  a  considerable 
period  of  time  and  is  then  issued,  the  stockholders  should 
all  have  an  equal  opportunity  to  subscribe  there  for.  ^^  Hold- 
ers of  preferred  stock  have  the  same  rights  of  subscription  as 
do  holders  of  common  stock,  unless  expressly  denied  them 
by  the  provisions  which  created  the  preferred  stock. 


7  Sternbergh  v.  Brock,  225  Ta.  St.  579  (1909);  Sterling  v.  H.  F.  Watson  Co., 
241   Pa.   St.    105   (191 3) • 

s  Fidelity  Trust  Co.  v.  Lehigh  Valley  R.  R.  Co.,  215  Pa.  St.  610  (1906) ;  Boardman 
V.    Lake   Shore    Ry.    Co.,   84   N.    Y.    157    (1881). 

» Way  V.  Am.  Grease  Co.,  60  N.  J.  Eq.  263,  (1900) ;  Electric  Co.  v.  Edison,  etc. 
Co.,  200  Pa.   St.   516   (1901);   Stokes  v.   Cont.   Trust  Co.,    186  N.    Y.   285    (1906). 

^0  Crosby  v.  Stratton,  68  Pac.  Rep.  130  (1902) ;  Archer  v.  Hesse,  164  App.  Div. 
(N.   Y.)   493,   497   (1914). 

"  Electric  Co.  v.  Edison  El.  Co.,  200  Pa.  St.  516  (1901)- 


I08  CORPORATE   CONTROL 

The  right  of  subscription  is  sometimes  of  considerable 
value,  as  where  a  new  issue  of  stock  is  authorized  at  a  fixed 
price  and  this  price  advances  before  the  day  of  sale. 

§  Qi-     (3)  Distribution  of  Assets  on  Dissolution 

Each  stockholder  is  entitled  to  share  equally  in  any  dis- 
tribution of  the  assets  of  the  corporation,  whether  on  final 
distribution  or  on  some  partial  intermediate  distribution. 
Under  whatever  proceedings  a  corporation  is  dissolved,  the 
general  rule  holds  that  all  corporate  obligations  and  the  ex- 
penses of  the  proceedings  must  first  be  discharged,  and  that 
any  remaining  assets  must  be  distributed  among  the  stock- 
holders, the  same  rules  applying  as  to  equality  of  payment, 
of  time,  and  of  kind,  as  in  the  case  of  dividends.^^ 

In  the  absence  of  any  express  provision  to  the  contrary, 
common  and  preferred  stock  share  alike  in  the  distribution 
of  assets.^^  If  by  its  terms  preferred  stock  takes  prece- 
dence, it  must  first  receive  any  assets  available  for  distri- 
bution up  to  its  full  face  value.  The  common  stock  then 
receives  any  remaining  assets  up  to  its  full  face  value.  If 
any  balance  of  assets  still  remains,  both  common  and  pre- 
ferred stock  participate  therein  alike,  unless  otherwise  ex- 
pressly provided.' 

§  92.     (4)  Inspection  of  Books 

Under  the  common  law  every  stockholder  had  the  right 
to  inspect  the  books  and  accounts  of  the  corporation  in  per- 
son or  by  agent  and  to  make  abstracts  or  copies  therefrom 
without  restriction,  save  that  the  examination  be  made  at 
a  reasonable  time  and  for  a  proper  purpose.  This  is  the  rule 
in  states  where  there  is  no  statutory  regulation." 


"2   Cook   on    Corp.,    §641. 

"  Coltrane    v.    Building    Assn.,    no    Fed.    Rep.    281    (190.1). 

**  Ranger  v.  Champion  Cotton  Press  Co.,  ci  Fed.  61  (1892);  Huylar  v.  Cragin 
Cattle  Co.,  40  N.  J.  Eq.  392  (1885);  Matter  of  Steinway,  159  N.  Y.  250  (1899);  State 
V.  Jessup  &  Moore  Paper  Co.,  88  Atl.  (Del.)  449  (1913.) ;  State  v.  Insurance  Co., 
160   Mo.   App.   354   iiQiz)' 


STOCKHOLDERS  109 

In  some  states  the  statutes  provide  that  a  stockholder 
desiring  to  examine  the  books  of  account  or  the  records  of  his 
corporation  must,  if  refused,  secure  an  order  of  court  for 
such  examination,  which  will  be  granted  only  when  he  shows 
some  good  reason  therefor/^  This  reason  must  be  substantial 
and  must  be  for  the  specific  purpose  of  investigating  some 
matter  concerning  the  management  of  the  corporation  in 
which  his  rights  as  a  stockholder  are  or  may  be  affected  in- 
juriously. ^'^ 

This  restriction  of  the  right  is  not  unreasonable.  It  is 
obvious  that  it  would  be  impracticable  in  a  large  modern 
corporation  with  its  multitude  of  scattered  stockholders  to 
allow  these  to  come  in  at  any  time  and  make  an  examination 
of  the  books.  The  interference  with  the  regular  business 
would  in  itself  be  intolerable,  but  beyond  this  the  right  might 
be  so  used  in  the  interest  of  business  competitors  as  to  render 
it  destructive  of  the  interest  of  the  stockholders  at  large. 

In  some  states  statutes  have  been  passed  which  enlarge 
the  stockholders'  usual  right  to  examine  the  corporate  records, 
and  in  a  few  states  the  right  has  been  considerably  extended. 
These  statutes  give  the  stockholders  the  right  to  inspect  the 
corporate  records  irrespective  of  the  purpose  for  which  the 
inspection  is  sought.^^  In  some  states  this  right  extends  to  all 
of  the  corporate  records,  and  in  most  of  the  states  there  is  a 
statutory  right  to  inspect  the  stock  and  transfer  books.^^  In 
New  Jersey  the  courts  hold  that  even  this  right  cannot  be 
enforced  unless  the  stockholder  can  show  some  reason  for  his 
inspection  "germane  to  his  status  as  a  stockholder."^^  In 
many  of  the  states  a  statutory  penalty  is  imposed  on  the 


i&Varney  v.  Baker,  194  Mass.  239  (1907);  Kuhbach  v.  Irving,  etc.  Co.,  220  Pa. 
St.  427  (1908). 

^'^  Phoenix    Iron    Co,    v.    Commonwealth,    113,   Pa.    St.    563    (1886). 

"  Poor  V.  Yarnell,  153  Pac.  (Gal.)  976  (1915,) ;  Baumrucker  v.  Jones,  1721  III. 
App.    188  (1912).  ^        ^       „ 

"Lozier  v.  Saratoga,  etc.  Co.,  59  App.  Div.  (N.  Y.)  39a  (1901) ;  State  v. 
Middlesex  Banking  Co.,  87  Conn.  483  (1913) ;  Wilkington  v.  Bradley,  in  Me.  3M 
(1914). 

« State  V.   National  Biscuit  Co.,   54  Atl.    (N.   J.)   241    (.^9^3)- 


no  CORPORATE   CONTROL 

corporate  officers  who  refuse  a  stockholder  the  right  of  in- 
spection prescribed  by  the  statutes.  In  such  cases  the  stock- 
holders' rights  are  not  difficult  of  enforcement.^" 

Where  the  right  to  examine  the  corporate  records  ex- 
ists, it  includes  the  right  to  make  copies  and  abstracts.^^ 
It  also  includes  the  right  to  be  accompanied  by  the  party's 
attorney  or  expert  accountant,  or  the  inspection  may  be 
delegated  to  one  or  both  of  these.^^ 

Lists  of  stockholders  in  the  larger  corporations  have  an 
actual  money  value,  and  in  New  York  the  practice  of  acquiring 
a  share  of  stock  in  one  of  the  large  companies  for  the  sole 
purpose  of  using  the  right  thus  obtained  to  copy  the  list  of 
stockholders  and  of  then  selling  the  list,  became  so  flagrant 
that  in  191 6  the  legislature  amended  the  law  so  as  to  limit  the 
right  of  inspection  to  persons  who  have  been  stockholders  of 
record  of  six  months,  or  to  persons  holding  stock  equal  to 
5  per  cent  of  all  the  outstanding  shares.  The  statute  ex- 
pressly provides,  however,  that  nothing  therein  shall  impair 
the  right  of  the  courts  to  compel  by  mandamus  the  production 
of  the  stock  book  for  the  examination  of  any  stockholder  upon 
good  cause  shown. 

§  93.     Special  Charter  Rights 

In  many  states  special  provisions  for  the  regulation  of 
the  business  and  the  conduct  of  the  affairs  of  the  corporation 
may  be  inserted  in  the  corporate  charter.  Where  this  privilege 
exists,  rights  not  usually  belonging  to  the  stockholders  of  a 
corporation  may  be  thereby  secured.  Thus,  stock  may  be 
classified  so  as  to  give  the  minority  stockholders  unusual 
voting  powers;  minority  representation  may  be  insured  by 
cumulative  voting;  the  right  to  examine  books  may  be  de- 


*>  Lozier   v.    Saratoga,   etc.    Co.,    59   App.    Div.    (N.    Y.)    390    (1901). 
21  Cincinnati    Volksblatt    Co.    v.    Hoffmeister,   62-0.    St.    189    (1900). 
"People    V.    Nassau    Ferry    Co.,  86   Hun    128    (i8;95) ;    State   v.    Insurance    Co.,    169 
Mo.  App,  354  (1912);  Varney  v.  Baker,  194  Mass.  239  O907). 


STOCKHOLDERS  HI 

fined  and  extended ;  the  right  to  be  present  at  directors'  meet- 
ings may  be  given ;  it  may  be  provided  that  profits  v^hen  they 
exist  shall  be  declared  as  dividends  at  regular  intervals,  or  the 
power  of  the  directors  to  pay  salaries,  contract  debts,  sell  cor- 
porate property,  and  the  like,  may  be  restricted. 

It  should  be  noted  that  special  provisions  incorporated 
in  the  charter  are  difficult  of  repeal  or  amendment.  For 
this  reason  only  those  w^hich  are  expressly  desired  to  be 
permanent  should  be  made  the  subject  of  charter  provision. 
Less  important  provisions  are  better  included  in  the  by-laws, 
where  they  may  be  changed  when  necessary  with  less 
formality. 

§  94.     Statutory  Rights 

In  most  of  the  states  the  usual  common  law  rights  of 
stockholders — discussed  in  the  preceding  sections — have  been 
re-enacted  in  the  statutes.  In  many  states  the  statutes  give 
the  stockholders  additional  rights,  some  of  which  have  already 
been  mentioned.  Thus,  in  New  York,  Kansas,  North  Dakota, 
and  a  number  of  other  states,  stockholders  may  call  for  state- 
ments and  reports  from  the  corporate  officials.  In  California 
and  Washington  they  may  inspect  mines  owned  by  the  cor- 
poration. In  Connecticut  any  stockholder  may  apply  for  a 
mandamus  to  compel  the  corporation  to  obey  the  statutes. 
In  Delaware  any  stockholder  rnay  demand  a  statement  of 
amounts  paid  on  capital  stock  and  the  amount  of  stock  issued. 
In  a  number  of  states  meetings  for  election  of  directors  may 
be  compelled  by  following  prescribed  procedure. 

§  95.     Powers 

The  individual  stockholder,  no  matter  how  large  his  hold- 
ing, has  no  power  as  a  stockholder  to  interfere  in  the  lawful 
management  of  the  company  or  its  business.^^    If  the  directors 

23  Demarest  v.  Spiral,  etc.  Tube  C( 
Co.  V.  Belmont,  206  iN.  Y.  71,  16  (1912). 


112  CORPORATE   CONTROL 

take,  or  are  about  to  take  any  illegal  or  wrongful  action,  he 
may  restrain  them  by  appeal  to  the  courts.  If,  however,  the 
action  taken  or  about  to  be  taken  is  in  itself  not  unlawful 
but  merely  objectionable  to  him,  his  only  recourse  is  to  induce, 
if  he  can,  a  majority  of  the  stockholders  to  act  with  him  in 
a  duly  assembled  stockholders*  meeting,  when  the  by-laws  may 
be  amended  or  such  other  remedial  steps  be  taken  as  may  be 
possible. 

The  collective  powers  of  the  stockholders  apply  to  but 
few  matters  and  may  be  summarized  as  follows: 

1.  Amendment  of  charter. 

2.  Adoption,  repeal,  or  amendment  of  by-laws. 

3.  Election  of  directors. 

4.  Sale  of  entire  assets. 

5.  Dissolution  of  corporation. 

6.  Exercise  of  any  special  charter  powers. 

§  96.     (i)  To  Amend  Charter 

A  charter  is  a  contract  between  the  state  and  the  stock- 
holders of  the  particular  corporation,  and  the  assent  of  both 
the  state  and  these  stockholders  is  a  prerequisite  to  its  amend- 
ment. In  most  of  the  states  the  statutes  provide  that  the 
charter  may  be  added  to  or  amended,  usually  in  certain  pre- 
scribed details  or  matters,  by  the  action  of  a  specified  pro- 
portion of  the  stockholders  ranging  upward  from  a  bare 
majority  to  three-fourths  of  the  outstanding  stock. 

§  97.     (2)  To  Adopt,  Repeal,  or  Amend  By-Laws 

The  adoption  or  amendment  of  by-laws  is  one  of  the 
common  law  powers  of  the  stockholders.  If  no  provision 
is  made  otherwise,  the  power  to  adopt,  amend,  and  repeal 
by-laws  rests  with  the   stockholders  alone,^*  who  must,   to 


="  Angel  &  Ames  on  Corp.,  §  327^ 


STOCKHOLDERS  II3 

exercise  this  power,  be  duly  assembled  in  a  meeting  at  which 
such  action  can  be  lawfully  taken. -^  If  the  charter  or  by- 
laws do  not  otherwise  prescribe,  the  by-laws  may  be  adopted, 
amended,  or  repealed  at  any  regular  meeting  of  the  stock- 
holders or  at  any  special  meeting  where  such  proposed  action 
has  been  duly  announced.  There  is  some  question  whether 
by-laws  may  be  adopted  or  amended  without  previous  notice 
at  the  annual  meeting  held  in  accordance  with  statutory  re- 
quirements, unless  the  charter  or  by-laws  expressly  so  pro- 
vide.'« 

If  the  power  to  adopt  by-laws  is  delegated  to  the  direc- 
tors, this  does  not,  unless  expressly  so  stated,  confer  on 
them  the  exclusive  right  to  make  by-laws  nor  empower  them 
to  repeal  by-laws  enacted  by  the  stockholders.^^ 

§  98.     (3)  To  Elect  Directors 

The  election  of  directors  is  one  of  the  common  law 
powers  of  stockholders  which  has  been  re-enacted  in .  the 
statutes  of  most  of  the  states.  In  all  corporations  for  profit 
the  power  exists  without  specific  statutory  authority.^^ 

In  the  absence  of  other  provision,  the  stockholders  have 
the  right  to  fill  vancancies  in  the  board  of  directors.  Ordina- 
rily, however,  either  by  statute  or  by-law  provision  this  power 
is  given  to  the  board. 

§  99.    (4)  To  Sell  Entire  Assets 

A  solvent  corporation  can  sell  only  its  entire  assets  by 
the  unanimous  consent  of  all  its  stockholders.^^  Where,  how- 
ever, a  corporation  is  financially  involved  or  likely  to  become 
so,  the  sale  of  all  its  property  may  be  made  in  any  manner 

^  North,    etc.    Co.   v.    Bishop,    103   Wis.   492   (1899). 

^  Bagley   v.    Reno,    etc.    Co.,   201    Pa.    St.   78   (1902). 

^  Stevens  v.  Davison,  18  Gratt.  (Va.)  819  (1868). 

^  Re  Union   Ins.   Co.,  22   Wend.   591    (1S40). 

» Abbott  V.  American  Hard  Rubber  Co..  33  Barb.  578  (1861);  People  v.  Bal- 
lard, 134  N.  Y.  269  (18912) ;  Eldred  v.  American  Palace  Car  Co.,  96  Fed.  Rep.  59 
(1899);  99  Fed.   Rep.   16S  (1900). 


114 


CORPORATE  CONTROL 


that  will  secure  a  fair  return,  by  authorization  of  a  majority 
of  the  stockholders.^"  Also  if  the  statutes  or  charter  so  pro- 
vide, the  entire  assets  of  a  corporation  may  be  sold  by  action 
of  a  majority  of  the  stockholders,  or  by  majority  action  of 
the  directors,  the  prescribed  formalities  being  duly  observed.^^ 

§  100.     (5)  To  Dissolve  the  Corporation 

"It  is  an  unquestioned  rule  that  all  the  stockholders,  by 
unanimous  consent,  may  effect  a  dissolution  of  the  corpora- 
tion by  the  surrender  of  the  corporate  franchises."^^  Where 
the  corporation  is  insolvent  or  is  in  danger  of  becoming  in- 
solvent, and  is  unable  to  further  conduct  its  corporate  busi- 
ness, a  majority  of  the  stockholders  may  effect  its  dissolution. 
This  is  the  extent  of  the  power  of  the  stockholders  under 
the  common  law.^^ 

Statutory  provisions,  however,  exist  in  a  majority  of 
the  states  prescribing  procedure  whereby  dissolution  may  be 
had* by  action  of  a  stated  majority  of  the  stockholders. 

§  loi.     (6)  Special  Powers 

In  many  states  special  powers  are  conferred  upon  the 
stockholders  by  express  statutory  provision.  Thus  in  Ken- 
tucky, Maine,  and  some  other  states,  it  is  provided  that  cor- 
porations may  merge  or  consolidate  with  others  upon  the  con- 
sent of  a  prescribed  majority  of  the  outstanding  stock,  usually 
with  a  provision  for  the  appraisement  and  purchase  of  the 
stock  of  any  dissenting  stockholder.  In  New  York,  Penn- 
sylvania, and  some  other  states  it  is  provided  that  any  mort- 
gage of  corporate  property  must  be  authorized  by  a  vote 
of   the   stockholders.      In   several   states,   as   California   and 


«'SeweIl  V.  East,  etc.  Co.,  50  N.  T.  Eq.  717  (1892);  Skinner  v.  Smith,  134  N.  Y. 
240    (1892);    Havden    v.    Official    Hotel*  Red-Book,    etc.    Co.,   42   Fed.    Rep.    875    (1890). 

31  Repxiblican,  etc.  Mines  v.  Brown,  58  Fed.  Rep.  644  (18931) ;  Peabody  v.  Westerly 
Waterworks,    20   R.    I.    176    (1697). 

"a  Cook   on   Corp.,   §629. 

» Berry  v.    Broach,   65    Miss.   4150   (1888);   Price   v.    Holcomb,   89  Iowa   123   (1893). 


STOCKHOLDERS  I 15 

Montana,  directors  may  be  removed  by  a  two-thirds  vote  of 
the  entire  stock.  In  the  states  where  special  provisions  may 
be  inserted  in  the  charter,  as  in  New  York,  Delaware,  and 
South  Dakota,  it  is  possible  to  extend  the  powers  of  stock- 
holders far  beyond  their  usual  scope. 

§  102.     Liabilities 

The  liabilities  of  stockholders  as  such  are  few — usually 
only  to  pay  the  full  par  value  of  the  stock  subscribed  for  or 
purchased  by  them.  If  subscriptions  are  not  paid  according 
to  their  terms,  or — when  subscriptions  are  unconditional — 
as  calls  are  made  by  the  directors,  the  corporation  may  either 
bring  suit  to  collect  unpaid  amounts,  obtain  judgment  and 
levy  on  the  stock  if  necessary,^*  or,  where  the  statutes  give 
such  power,  may  forfeit  the  delinquent  stock.  If  the  cor- 
poration does  neither,  the  liability  of  the  stockholder  on  his 
unpaid  stock  still  remains  for  the  benefit  of  creditors  of  the 
corporation  in  case  of  its  insolvency. ^^ 

When  the  statutory  forfeiture  of  stock  for  unpaid  calls 
is  enforced  in  good  faith,  a  stockholder  who  is  thus  deprived 
of  his  stock  is  released  from  further  liability  to  the  corpora- 
tion and  its  creditors.  When  stock  is  so  forfeited,  it  is 
necessary  to  observe  the  prescribed  statutory  formalities  care- 
fully, as  otherwise  the  proceedings  may  be  set  aside  and  the 
corporation  be  liable  in  damages.^^ 

As  a  rule,  corporate  creditors  must  first  proceed  against 
the  corporation  for  the  collection  of  their  claims.  If  they 
secure  judgment  against  the  corporation  and  are  unable  to 
collect  from  it,  they  may  then  proceed  against  any  stockholder 
who  has  not  paid  in  full  for  his  stock.^^  If,  however,  the 
corporation  has  been  dissolved  or  is  notoriously  insolvent, 

®*  Nashua  Bank  v.  Anglo-Am.  Co.,  169  U.  S.  221  (i903')-  ^^     „ 

^Scovill    V.    Thayer,    105    U.    S.    143,    156    (1881) ;    Hawkins   v.    Glenn,    iji    U.    S. 
319.    3S4    (1868). 

36  Lewey's   Island   R.    R.   Co.  v.   Bolton,  48   Me.  451    (i860). 
a'Wetherbee  v.   Baker,  35   N.   J,   :&q,  5Q1    (1882). 


Il5  CORPORATE   CONTROL 

creditors  may  sometimes  proceed  directly  against  the  stock- 
holders of  the  corporation.^^  If  the  corporation  goes  into 
the  hands  of  an  assignee,  a  receiver  or  a  trustee  in  bankruptcy, 
it  is  the  duty  of  that  official  to  collect  all  unpaid  subscrip- 
tions.^^ 

The  fact  that  other  stockholders  have  not  paid  their  sub- 
scriptions does  not  avail  a  stockholder  as  a  defense  against 
payment  of  his  own  subscription.  Nor  has  he  any  claim 
against  these  other  subscribers.  When,  however,  payment 
of  his  subscription  is  enforced  by  corporate  creditors,  the 
conditions  are  different.  A  corporate  creditor  need  not,  as 
a  rule,  proceed  against  or  join  all  the  stockholders  whose 
subscriptions  are  unpaid  but  may  collect  from  any  one  or 
more  of  them  up  to  the  full  amount  due  on  their  stock  if  his 
claim  amounts  to  so  much.  In  such  case,  as  the  corporate 
debts  are  a  joint  obligation  to  be  borne  by  all  the  delinquent 
stockholders  in  proportion  to  the  amounts  due  on  their  stock, 
any  subscribers  who  are  compelled  to  pay  more  than  their  due 
proportion  can  compel  contribution  from  other  delinquent 
stockholders  up  to  their  proportion  of  the  debts  paid.^** 

The  stockholder  who  is  not  an  original  subscriber,  but 
who  purchases  outstanding  stock  in  good  faith  with  the 
understanding  or  express  statement  that  it  is  full-paid,  and 
particularly  when  the  certificates  are  so  marked,  does  not 
incur  any  liability  either  to  the  corporation  or  its  creditors 
even  though  the  subscription  price  or  the  par  value  of  such 
stock  has  not  been  paid  in  to  the  corporation.  In  any  such 
case  the  unpaid  liability  on  the  stock  either  remains  with 
the  transferrer  or  is  lost."*^ 

When,  however,  a  purchaser  takes  unpaid  stock  with  a 


<*i>> 


38  Terry  v.    Tubman,   93  U.    S.    156   (18751);   Terry  v.   Anderson,  95  U.    S.    628,   636 
n  re  Crystal   Spring   Co.,  96   Fed.   945    (1899);    Scovill  v.   Thayer,   105  U.    S.    143 


(1881). 

«>4   Thomp.    Corp.,    §3816. 

*i  Brant  v.   Ehlen,  59  Md.    i   (1882);   Rood  v.   Whorton,  67  Fed.  434  (1895). 


STOCKHOLDERS  1 1 7 

knowledge  of  the  conditions,  the  liabiHty  for  any  call  already 
made,  even  though  the  payment  date  of  such  call  has  not  yet 
arrived,  remains  with  the  transferrer,  but  the  transferee  is 
liable  for  any  subsequent  calls/^ 

The  general  rule  is,  however,  modified  by  statute  in  many 
of  the  states.  Thus  in  Oregon  and  Tennessee  the  liability 
on  unpaid  stock  remains  with  the  transferrer,  while  in 
Kentucky  it  continues  with  the  transferrer  for  two  years  from 
the  date  of  transfer,  and  in  Maine  and  Mississippi  for  one 
year.  In  Wisconsin  the  liability  may  be  shifted  to  the  trans- 
feree with  the  consent  of  the  corporation  but  the  liability  of 
the  seller  continues  notwithstanding  for  six  months  after 
the  transfer.  In  Nebraska  the  liability  follows  the  unpaid 
stock.     In  Illinois  both  transferrer  and  transferee  are  liable. 

The  common  law  liability  of  holders  of  unpaid  stock 
for  any  unpaid  portion  of  its  par  value  is  confirmed  by  statute 
in  most  states  of  the  Union.  In  a  few  states  this  common 
law  liability  has  been  extended,  and  in  a  number  of  states 
additional  liabilities  are  imposed.  These  subsequent  or  addi- 
tional liabilities  extend  to  all  stockholders  whether  their  stock 
is  full-paid  or  otherwise.  This  liability  on  unpaid  stock  may, 
by  agreement  of  the  corporation,  be  terminated  as  between 
the  corporation  and  its  stockholders,  but  would  still  exist  as 
between  these  stockholders"  and  creditors  of  the  corporation, 
and  on  the  insolvency  of  the  corporation  would  become  im- 
mediately effective."     (See  §  3.) 


*2  Webster   v.    Upton,   91    U.    S.    6e,    (1875).  .        s     t,         •  1 

"Goodnow  V.   Amer.   Writing  Paper  Co.,   66  Atl.    (N.   J.)   607   (1907);   Bostwick  v. 

Young,  118  App.  Div.  (N.  Y.)  4Q0  (1907)  I  aflFd.,  194.  N.  Y.  516  (1909).    ^  .        . 

**  Merchants    Mutual    Adjusting    Agency    v.    Davidson,    23    Cal.    App.    274    {19x3)  I 

Southworth    v.    Morgan,    205    N.    Y.    293    (1912) ;    Dickerman    v.    Northern    Trust    Co., 

176  U.   S.    181    (1900). 


CHAPTER   XIII 

DIRECTORS 

§  103.     Powers  of  Directors 

The  board  of  directors  is  the  managing  body  of  the  cor- 
poration. Unless  restricted  by  statute,  charter,  or  by-laws,  it 
exercises  the  active  controlling  power  in  all  corporate  busi- 
ness. "The  board  of  directors  and  not  the  stockholders,  nor 
the  president,  secretary,  treasurer,  or  other  agent,  is  the 
original  and  supreme  power  in  corporations  to  make  corporate 
contracts."^  The  directors  are  the  embodied  power  of  the 
corporation,  so  constituted  by  the  mere  fact  of  their  appoint- 
ment.^ The  stockholders  can  neither  force  the  directors  to 
act  nor  restrain  them  from  acting — save  by  charter  or  by- 
law provision — unless  the  omission  in  the  one  case  or  the  act 
in  the  other  is  so  glaringly  unjust  or  injurious  to  the  interests 
of  the  stockholders  as  to  warrant  an  appeal  to  the  courts. 

The  powers  of  the  board  do  not,  however,  extend  beyond 
the  purposes  for  which  the  Corporation  was  formed.  Thus 
the  sale  of  the  entire  assets,  the  dissolution  of  the  corpora- 
tion or  a  radical  change  of  its  business  are  not  within 
the  unsupported  power  of  the  board.  Also  the  statutes  in 
the  different  states  restrict  in  greater  or  less  degree  the 
common  law  powers  of  the  board.  Thus,  as  a  rule,  directors 
are  not  allowed  to  issue  bonds  or  to  mortgage  corporate 
property  unless  expressly  authorized  thereto  by  the  stock- 
holders. Also  the  absolute  authority  of  the  board  may  always 
be  limited  by  charter  or  by-law  provisions.  On  the  other  hand, 
the  powers  of  directors  are  sometimes  extended  by  charter 


^3   Cook  on   Corp.,    §709,    712. 

2  Landers  v.  Frank  St.  M.  E.  Church,  114  N.  Y.  626  (i 

118 


DIRECTORS  I IQ 

or  by-law  provisions,  or  by  the  statutes,  in  the  latter  case 
mainly  as  to  adoption  of  by-laws. 

The  authority  of  the  directors  may  be  exercised  only 
as  a  board  in  duly  assembled  meeting  with  a  quorum  present.^ 
A  single  director,  as  such,  has  absolutely  no  authority  over  the 
corporate  affairs.*  He  may  be  appointed  by  the  board  to 
manage  some  feature  of  the  corporate  business,  or  as  manag- 
ing director  may  practically  control  the  corporate  affairs,  but 
in  any  such  case  his  powers  are  only  those  which  are  delegated 
to  him  by  the  board  and  are  limited  strictly  by  the  terms  of  his 
appointment.^  As  a  knowledge  of  the  corporate  affairs  is 
essential  to  the  proper  discharge  of  his  duties,  he  has  a  right 
to  inspect  the  records  and  the  property  of  the  corporation 
and  to  familiarize  himself  with  its  operations.*  He  is  also 
entitled  to  attend  any  meeting  of  the  standing  committees,^ 
to  be  notified  of  all  special  meetings  of  the  board,  to  attend 
all  board  meetings  and  to  be  heard,  if  he  so  desires,  on  all 
matters  coming  before  any  such  meeting.^  If  he  discovers 
anything  wrong  in  the  conduct  of  the  corporate  affairs,  he  has 
no  individual  power  to  right  it,  but  must  present  the  matter 
to  the  board  for  its  action. 

Directors  of  a  corporation  are  virtually  trustees  for  the 
body  of  stockholders,  and  must  exercise  the  same  care  and 
diligence  in  the  conduct  of  the  corporate  affairs  as  prudent 
business  men  would  exercise  in  the  conduct  of  their  own 
affairs.^  As  trustees,  they  must  have  no  interest  adverse  to 
the  interest  of  the  company.  Too  often  directors  are  not  as 
scrupulous  as  they  should  be  in  this  particular. 


» North    Hudson,    etc.    Assn.    v.    Childs,    82    Wis.    460    (1892) ;    Ames    v.    Goldfield 
Merger    Mines    Co.,    22.J    Fed.    292,    301    (1915). 

*  Alabama   Nat.    Bank   v.    O'Neil,    128  Ala.    192   (igcx)) ;    Gaynor  v.    R.    R.,    189   Pa. 

St.  5  (1899). 

"  Clark    &    Marshall    on    Corp.,    §  600. 

"  People    V.    Throop,    12   Wend.    (N.    Y.)    183    (1834) ;    Rosenfield   v.    Einstein,   46 
N.  J.   L.  479,  484  (1884). 

'Western    Ry.    v.    Rushout,    5,  De   G.    &    Sm.    290    (1852). 

*  Metropolitan,    etc.    Co.    v.    Domestic,    etc.    Co.,   44   N.    J.    Eq.    568    (1888);    Curtin 
V.    Salmon,   etc.    Co.,    130   Cal.    345    (1900) ;    Broug-htor  v.    Jones,    120   Mich.   462    (1899). 

•3   Cook   on   Corp.,    §648;    Elliott   v.    Baker,    1941   Mass.    518   (1907);   Gen.    Rubber 
Co.    V.    Benedict,   215   N.    Y.    18   (191 5). 


I20 


CORPORATE   CONTROL 


§  104.     Appointment  and  Removal  of  Officers  and  Agents 

The  authority  of  the  board  to  appoint  and  remove  offi- 
cers and  agents  of  the  corporation  is  not  a  common  law 
power,  but  must  be  given  it  by  statute,  charter  or  by-law 
provision.  Unless  this  is  done,  the  power  belongs  to  and 
may  be  reserved  by  the  stockholders.     (See  §§  115,  120.) 

§  105.     Appointment  of  Standing  Committees 

Standing  committees  are  those  permanent  committees  of 
the  board  to  which  some  measure  of  its  discretionary  power 
has  been  delegated.  The  board  has  general  power  to  appoint 
standing  committees.  Their  purpose  is  twofold:  (i)  to  se- 
cure the  prompt,  decisive  action  of  a  small,  easily  assembled 
body,  and  (2)  to  obviate  the  necessity  for  frequent  meetings 
of  the  board. 

As  the  discretionary  powers  of  the  board  itself  are  dele- 
gated to  standing  committees,  they  must  be  composed  of 
members  of  the  board.  Their  powers  are  exercised  during 
the  interim  between  the  board  meetings,  and  within  the  limits 
of  their  authority  they  act  with  the  same  binding  force  and 
effect  as  the  board  itself  and  their  contracts  are  not  subject 
to  revision  by  the  board. 

When  authorized  thereto  by  the  charter  or  by-laws  of 
the  corporation,  the  power  of  the  board  to  delegate  its  au- 
thority to  properly  constituted  standing  committees  is  well 
established.  How  much  power  should  be  so  delegated  is 
to  be  determined  by  the  nature  and  conditions  of  the  com- 
pany's business. 

It  is  but  rarely  that  more  than  two  standing  commit- 
tees are  deemed  necessary.  If  but  one  committee  exists, 
it  is  usually  termed  the  "executive  committee,"  and  its  powers 
are  ordinarily  those  of  the  board.  If  two  committees  are 
appointed,  the  second  is  usually  designated  the  "finance  com- 
mittee,'* and  to  this  committee  is  given  direct  supervision  of 


DIRECTORS 


121 


the  corporate  finances  and  accounts;  all  general  matters  re- 
maining in  charge  of  the  executive  committee.  The  matter  is, 
however,  one  to  be  regulated  by  the  charter  or  by-laws,  and 
variations  of  the  usual  arrangements  are  frequent. 

When  standing  committees  are  appointed  with  the  usual 
powers,  they  are  the  real  managing  bodies  of  the  corporation, 
the  board  merely  receiving  their  reports  and  supervising  their 
operations.  In  a  small  corporation  or  any  corporation  with  a 
compact,  easily  assembled  board,  they  are,  as  a  rule,  an  un- 
necessary and  even  undesirable  complication.  They  are  ad- 
vantageous only  when  the  board  is  so  large  or  so.  scattered 
as  to  be  difficult  of  assembling,  or  when  for  other  reasons  the 
business  of  the  corporation  cannot  be  properly  transacted  by 
the  board  as  a  whole.  Not  infrequently  the  standing  com- 
mittee is  used  as  a  device  by  which  a  few  men  practically 
manage  the  affairs  of  the  corporation,  the  board  being  super- 
seded when  there  is  no  real  reason  for  such  action. 

The  membership  of  standing  committees  is  seldom  less 
than  three,  nor,  save  in  very  large  corporations,  more  than 
five.  To  increase  the  number  renders  the  standing  com- 
mittee unwieldy  and  defeats  the  purpose  of  its  creation. 

§  1 06.     Adoption  of  By-Laws 

Originally  the  stockholders  were  supposed  to  express  their 
wishes  as  to  the  management  of  the  corporation  through  the 
by-laws,  and  the  directors  to  exercise  their  powers  in  subordi- 
nation thereto. ^°  Of  late  years,  however,  in  many  states  the 
statutes  confer  upon  the  directors  more  or  less  extended 
power  to  adopt  by-laws.  In  some  of  these  states  the  by-laws 
adopted  by  the  directors  must  be  either  in  harmony  with  the 
by-laws  passed  by  the  stockholders,  or  subject  to  their  revi- 
sion, but  in  some  few  states  the  board  is  given  the  sole  and 


10  North  Milwaukee,  etc.,  Co.  v.  Bishop,  103  Wis.  492  (1899) ;  Morton,  etc.,   Co.  v. 
Wysong,   51   Ind.  4   (18715). 


122  CORPORATE   CONTROL 

entire  right  to  adopt  by-laws.  Also  in  some  other  states  they 
are  given  power  to  make  by-laws  for  their  own  government. 
When  the  stockholders  have  by  by-law  provision  delegated 
the  power  of  making  by-laws  to  the  directors,  it  has  been 
held  that  the  directors  are  not  thereby  authorized  to  repeal 
by-laws  passed  by  the  stockholders."  Unless  directors  are 
given  independent  power  to  adopt  by-laws  by  statute  or 
charter  provisions,  their  by-laws  may  be  repealed  or  amended 
at  any  duly  assembled  stockholders'  meeting. 

§107.     Common  Law  Liability  of  Directors 

The  liabilities  of  directors  fall  naturally  under  two  heads 
— common  law  liabilities  and  liabilities  imposed  by  statute. 
Under  the  common  law  the  directors  are  personally  liable  for 
loss  or  damage  resulting  from  ultra  vires  acts  ;^^  for  any  un- 
lawful corporate  act  committed  with  their  connivance,  assent, 
or  knowledge;  for  issuance  of  unpaid  or  partly  paid  stock  as 
full-paid ;  for  paying  dividends,  either  negligently  or  wilfully, 
that  impair  the  capital  stock,  and  for  any  other  gross  mis- 
management. As  trustees  for  the  company,  they  are  bound 
to  give  its  affairs  all  requisite  care  and  attention.  If  they  do 
not,  they  are  responsible  for  any  resulting  loss  or  damage. ^^ 
They  are  not,  however,  responsible  for  the  results  of  errors 
of  judgment  in  their  management  of  the  ordinary  business 
affairs  of  the  corporation." 

§  108.     Statutory  Liabilities  of  Directors 

In  almost  every  state  of  the  Union  liabilities  have  been 
imposed  upon  directors  by  statute.     Thus  in  New  York — 


11  Stevens   v.   Davison,   18  Gratt.    (Va.)   819   (1868). 

"  National  Cash  Reg.  Co.  v.  Leland,  94  Fed.  502  (1899) ;  McKinnon  v,  Morse, 
1751   Fed.    576   (1910) ;    Hill   v.    Murphy,   212  Mass.    i,   2    (1912). 

"3  Cook  on  Corp.,  §703;  Cassidy  v.  Uhlmann,  170  N.  Y.  505  (1902);  Hayes  v. 
Pierson,  65  N.  J.  Eq.  353  (i9t>3') ;  Elliott  v.  Baker,  194  Mass.  518  (1907) ;  Childs  v. 
White,  158  App.   Div.   (N.   Y.)   i   (1913). 

"Chick  V.  Fuller,  114  Fed.  22  (1902);  United  Zinc  Cos.  v.  Harwood,  at6  Mass. 
474.  ^  (1914);   Holmes  v.   St.  Joseph  Lead  Co.,   168  App.  Div.  (N.  Y.)  688  (19151). 


DIRECTORS  123 

a  typical  state—directors  may  be  held  personally  liable  as 
follows : 

1.  For  declaring  dividends  except  from  surplus  profits, 
.    or  for  dividing,  withdrawing,  or  paying  out  any 

part  of  the  capital  except  that  authorized  by  law. 

2.  For  making  a  loan  of  corporate  money  to  any  stock- 

holder, or  for  discounting  from  corporate  funds 
any  note  or  evidence  of  debt  for  any  stockholder, 
or  for  receiving  the  same  for  any  instalment  due 
on  stock. 

3.  For  making  any  certificate  or  report  or  public  notice 

that  is  false  in  any  material  respect. 

4.  For  making  transfers  of  property  to  officers  or  stock- 

holders when  the  company  is  insolvent  or  threat- 
ened with  insolvency,  for  the  purpose  of  preferring 
or  defrauding  creditors. 

5.  In  case  of  dissolution,  as  trustees  for  all  corporate 

property  that  may  come  into  their  hands. 

In  the  majority  of  the  states  directors  guilty  of  most  of 
the  enumerated  offenses  are  not  only  personally  liable,  but 
are  also  criminally  liable  under  the  laws  against  fraud, 
larceny,  and  embezzlement. 

When  any  action  is  taken  by  the  board  in  violation  of 
law  or  which  might  involve  its  members  in  a  liability,  any 
dissenting  director  may  always  relieve  himself  from  responsi- 
bility by  proper  procedure.  In  some  states  this  procedure  is 
prescribed  by  statute.  Usually  it  involves  the  entry  of  his 
dissent  or  protest  on  the  minutes  of  the  particular  meeting,  or, 
if  such  entry  is  refused,  publication  of  the  protest. 

It  may  be  said  generally  that  the  law  as  to  the  liabilities 
and  obligations  of  directors  is  much  more  satisfactory  in 
theory  than  in  practice,  and  that  the  best  possible  method  of 
avoiding  loss  through  wrongful   or  ill-judged  acts  of  the 


124 


CORPORATE  CONTROL 


directors  is  to  confine  the  membership  of  the  board  to  men  of 
known  integrity  and  character. 

§  109.     Resignation  of  Directors 

A  director  is  under  no  obligation  to  continue  in  the  service 
of  his  corporation  longer  than  he  desires.  Even  though  the 
statutes  or  by-laws  provide  that  he  shall  continue  in  office 
until  the  end  of  his  term,  he  may  resign  at  any  time  and  there- 
by terminate  his  official  position.^^ 

The  effect  of  a  resignation  is  governed  by  its  terms.  It 
may  be  tentative,  requiring  acceptance  by  the  board  before  it  is 
effective,  or  peremptory  and  effective  as  soon  as  delivered  to 
the  proper  representative  of  the  corporation.^^ 

The  resignation  should,  for  purposes  of  record  and  proof, 
be  in  writing,  but  an  oral  resignation  properly  presented  to 
the  board  of  directors  and  recorded  in  the  minutes  as  so 
presented,  is  sufficient.  It  is  obvious,  however,  that  an  oral 
resignation  is  objectionable  on  account  of  its  difficulty  of 
proof.  A  peremptory  resignation  may  be  made  effective  at  a 
future  date.  A  tentative  resignation  may  fix  a  future  date 
on  which  it  will  be  effective  if  accepted. 

A  peremptory  resignation  cannot  be  withdrawn  after  its 
formal  presentation  to  the  board,  save  with  the  consent  of  the 
board.  A  tentative  resignation  may  be  withdrawn  at  any  time 
before  its  acceptance.  (See  Chapter  LXXIX,  "Resignations.") 

§110.     Removal  of  Directors 

The  directors  have  no  power  to  suspend  or  remove  a  fellow 
member  of  the  board.  The  stockholders  have  a  common  law 
power  to  remove  directors  for  adequate  cause,  but  such 
removals  are  not  frequent.  The  cause  must  be  good  and 
capable  of  proof,  charges  must  be  preferred,  a  meeting  must 


^^3  Clark   &  Marshall   on   Corp.,    §667  and   cases   cited;    Briggs   v.    Spaulding,   141 
S.    132   (1891);   Will   of   McNaughton,    138  Wis.    179,  208   (1909). 
i<>  Manhattan  Co.  v.    Kaldenberg,   165   N.   Y.   i    (1900). 


DIRECTORS  125 

be  called,  and  the  accused  be  given  a  hearing.  The  whole 
procedure  is  troublesome,  and  it  is  usually  preferable  to  await 
the  expiration  of  an  offending  director's  term  rather  than  to 
attempt  his  forcible  removal  sooner. 

In  some  states,  however,  the  statutes  extend  this  common 
law  power  of  removal,  and,  wherever  special  provisions  are 
permitted  in  the  charter,  the  same  end  may  be  attained  by 
proper  charter  provision.  When  thus  given  by  the  statutes  or 
charter,  the  power  of  removal  is  usually  summary,  i.e.,  an 
objectionable  director  may  be  removed  by  prescribed  pro- 
cedure— usually  by  a  two-thirds  vote  of  the  stock,  but  in  a  few 
states  by  a  bare  majority — at  once  and  with  or  without  cause. 
Under  these  circumstances  the  removal  of  directors  is  more 
frequent. 

When  the  office  of  director  has  been  usurped  or  is  unlaw- 
fully held,  and  is  claimed  by  a  party  who  is  not  in  possession, 
a  writ  of  quo  zvarranto  will  lie  or  an  equitable  action  for 
possession  may  be  instituted." 

§111.     Vacancies  on  the  Board 

The  stockholders  alone  have  power  to  fill  vacancies  on 
the  board,  unless  otherwise  expressly  provided  by  statute, 
charter,  or  by-laws.  Such  vacancies  must  therefore  await 
the  election  of  directors  at  the  next  annual  meeting,  or  be 
filled  by  special  election,  unless  the  power  of  filling  vacancies 
has  been  conferred  upon  the  board.^^  It  is  advisable  that  the 
directors  have  this  power,  and  in  practice  it  is  almost  invari- 
ably given  them. 

Vacancies  on  the  board  may  be  caused  by  the  death,  re- 
moval, resignation,  or  disability  of  a  director,  or  the  failure  of 
a  director-elect  to  accept  his  office. ^^     The  continued  absence 


"  Powers  V.  Blue,  etc.,  Assn.,  86  Fed.  705  (1898) ;  People  v.  Powell,  201  N.  Y. 
194   (1911). 

^^  In  re  Griffing  Iron  Co.,  63,  N.  J.  L.  168,  357  (1899);  2  Thompson  on  Corp., 
§  1083. 

">Whittaker  v.  Amwell  Nat.  Bank,  52  N.  J.  Eq.  400  (1894);  United  Growers  Co. 
V.   Eisner,  22  App.   Div.   (N.   Y.)   i    (1897). 


126  CORPORATE   CONTROL    . 

of  a  director  from  meetings  is  not  itself  sufficient  to  vacate 
his  position.  If  it  is  desired  that  such  continued  absence  shall 
have  this  effect,  the  by-laws  should  so  provide,  specifying  the 
exact  number  of  consecutive  absences  from  regular  meetings 
or  from  regular  and  special  meetings  necessary  to  create  a 
vacancy. 

A  board  of  directors  may  legally  continue  to  act  in  spite  of 
vacancies,  provided  enough  remain  to  make  up  a  quorum  of 
the  whole  board.  Less  than  a  quorum  of  the  board  cannot  fill 
vacancies  unless  expressly  so  empowered  by  charter  or 
by-laws. 

§112.    Directors  Holding  Over 

"If  the  directors  shall  not  be  elected  on  the  day  designated 
in  the  by-laws,  or  by  law,  the  corporation  shall  not  for  that 
reason  be  dissolved ;  but  every  director  shall  continue  to  hold 
his  office  and  discharge  his  duties  until  his  successor  has  been 
elected."^"  This  statement  of  the  law  taken  from  the  New 
York  statutes  is  also  a  statement  of  the  common  law,  existing 
in  practically  every  state  of  the  Union.^^  A  similar  provision 
also  usually  appears  in  the  by-laws. 

The  powers  of  directors  who  continue  in  office  because  of 
a  failure  to  elect  their  successors  are  the  same  in  every  respect 
as  before  their  term  of  office  expired.  They  are  directors 
both  de  jure  (by  right)  and  de  facto  (in  fact),  and  their  acts 
are  valid.^ 

The  smaller  corporations  relying  upon  this  condition  some- 
times omit  the  annual  meeting  with  its  election  of  directors 
for  years,  thereby  avoiding  the  formalities  of  the  annual  meet- 
ing. In  such  case  the  old  board  holds  over  indefinitely,  and, 
duly  empowered  thereto  by  charter  or  by-laws,  fills  by  vote 


Gen.   Corp.  Law,  N.  Y.,   §  28. 

State  V.  Bonnell,  35  Ohio  St.  10  (187S) ;  Appleton  v.  Am.  Malting  Co.,  65  N.  J. 

(1890): 


"a  Cook  on  Corp.,   §71^;    Kent  Co.,   etc..   Society  v.    Houseman.  81    Mich.   609 


DIRECTORS  127 

of  its  own  members  any  vacancies  that  may  occur.  As  long 
as  the  stockholders  do  not  protest,  the  practice  is  not  legally 
objectionable.  In  New  York  the  omission  of  the  election  of 
directors  for  eight  years  has  been  upheld.^^ 

§  113.     Directors  Dealing  with  Corporation 

The  subject  of  directors'  dealings  with  their  corporations 
is  too  extensive  for  full  treatment  here.  A  director  occupies 
a  fiduciary  relation  to  his  corporation  and  should  as  far  as 
possible  avoid  any  position  in  which  his  personal  interest  is 
adverse  to  that  of  the  corporation.  He  may,  however,  speak- 
ing generally,  make  any  contract  with  his  corporation  that  is 
fair  and  to  its  interest.  His  contract  is  therefore  not  void 
but  merely  voidable,  and  if  no  stockholder  objects  will  stand. ^* 
Also  cases  have  arisen  where  a  contract  between  a  director  and 
his  corporation  has  been  ratified  by  a  majority  of  stockholders 
at  a  duly  called  meeting,  and  the  courts  have  sustained  the 
contract.^^  Also,  if  all  the  stock  is  owned  by  the  directors  and 
there  are  no  creditors,  a  director  may  contract  with  his  cor- 
poration at  pleasure.^^ 

In  all  cases  where  a  director  is  personally  interested  in  any 
particular  contract  or  other  matter  to  be  acted  upon  by  the 
board,  he  should  withdraw  from  the  room  while  the  vote  is 
being  taken  and  his  absence  should  be  noted  on  the  minutes. 
To  be  valid  the  action  must  be  taken  by  a  legal  quorum  ex- 
clusive of  the  interested  party. ^^ 


^  Geneva  Mineral  Springs  v.  Coursey,  45  App.  Div,  (N.  Y.)  268,  275  (1899). 

'*  Fort  Payne  Rolling  Mill  v.  Hill,  174  Mass.  2241  (1899) ;  Welch  v.  Bank,  122 
N.  Y.   177  (1890);  Cont.   Ins.  Co.  v.   N.  Y.,  etc.,  R.   R.   Co.,  187  N.   Y.  22s  (1907). 

*  Nye  V.  Storer,  168  Mass.  53  (1897) ;  Gamble  v.  Queens  Co.  Water  Co.,  123.  N.  Y. 
91   (1890). 

»McCracken  v,  Robison,  57  Fed.  375  (1893);  Barr  v.  R.  R.  Co.,  125  N.  Y.  263 
(1891)- 

^  Curtin  v.  Salmon,  etc.,  Co.,  130  Cal.  345  (1900) ;  Steele  v.  Gold,  etc.,  Co.,  95 
Pac.    (Colo.)  349  (1908);  Schaffhauser  v.   Brewing  Co.,  2l8  Pa.   St.  2^  (1907). 


CHAPTER  XIV 

OFFICERS 

§  114.     General 

The  term  "officers"  is  here  applied  to  those  permanent 
agents  of  the  corporation  appointed  or  elected — usually  by 
the  board  of  directors — as  the  direct  representatives  of  the 
board  and  of  the  corporation.  The  directors  themselves  are 
at  times  and  with  legal  correctness  styled  ''officers/'  but  to 
avoid  confusion  the  term  is,  as  a  rule,  employed  in  the  present 
volume  to  designate  those  officials  subordinate  to  the  board. 
(See  Ch.  XXX,  *'By-Law  Provisions  Relating  to  Officers.") 

The  necessary  officers  of  a  corporation,  sometimes  termed 
the  ''executive  officers,"  are  the  president,  secretary,  and 
treasurer.  One  or  more  vice-presidents  are  usual.  In  addi- 
tion to  these,  other  officers  or  agents  are  frequently  appointed, 
as  managing  directors,  general  managers  or  superintendents, 
counsel,  auditors,  and  special  agents  for  particular  purposes. 

§  115.     Appointment  of  Officers 

The  stockholders  have  the  original  right  to  elect  or  appoint 
officers  of  their  corporation,  and  in  the  absence  of  preventing 
statutes  this  power  may  be  reserved  to  them.  In  practice, 
however,  by  express  provision  of  the  statutes,  charter,  or 
by-laws,  the  power  of  appointing  officers  is  almost  invariably 
vested  in  the  board  of  directors. 

The  election  of  one  person  to  two  corporate  offices  is 
common,  and  is  usually  authorized  by  charter  or  by-law 
provision.  If  otherwise,  the  board  still  has  power  to  com- 
bine any  two  or  more  official  positions  in  one  person  if  the 
duties  of  the  combined  positions  do  not  conffict.^ 

»  People  V.  Green,  58  N.  Y.  295-304  (1874) ;  3  Cook  on  Corp.,  §  712. 

128 


OFFICERS  129 

The  term  for  which  corporate  officials  are  elected  is 
usually  prescribed  by  proper  charter  or  by-law  provision,  and 
seldom  exceeds  one  year.  As  a  matter  of  business  policy  such 
term  should  not  be  longer  than  that  of  the  directors  by  whom 
the  officials  are  elected.  That  is,  if  the  directors  are  elected 
annually,  the  officers  also  should  be  elected  annually  so  that 
each  new  board  may  appoint  its  own  agents. 

The  appointment  of  managers,  experts,  or  other  specially 
skilled  employees  is,  however,  of  a  different  nature.  These 
are  not  so  directly  agents  of  the  board,  and  contracts  for  their 
services  extending  over  a  term  of  years  are  frequently  ad- 
vantageous or  even  necessary  to  the  corporation.  Siich  con- 
tracts are  entirely  within  the  power  of  the  board  without 
special  charter  or  by4aw  authorization. 

Unless  they  resign  or  are  removed  in  some  manner,  the 
corporate  officials  hold  over  after  the  expiration  of  their 
elective  term,  until  they  are  relieved  by  properly  elected 
or  appointed  successors.^  This  is  frequently  a  statute,  charter, 
or  by-law  provision,  but,  if  otherwise,  is  a  matter  of  common 
law.  These  officials  have  every  power  that  they  possessed 
before  the  expiration  of  their  elective  terms. 

As  the  board  elects  and  appoints  officers,  it  has  also  the 
power  to  fill  vacancies  among  them  without  specific  authoriza- 
tion. 

§  116.     Qualifications  of  Officers 

The  officers  are  the  agents  of  the  board  of  directors  and  of 
the  corporation.  Hence  any  one  who  may  act  as  an  agent  is 
capable  of  acting  as  a  corporate  official,  and,  in  the  absence 
of  prohibition,  a  married  woman,  a  minor,  an  alien,  or  one  of 
its  own  directors  may  be  legally  elected  as  an  officer  of  the 
corporation. 


'  Mining  Co.  v.  Abraham,  26  Ore.   282  (18Q4) ;  Agricultural   Soc.   v.    Houseman,  81 
Mich.  609  (1890);  Quitman  Oil  Co.  v.  Peacock,  81  S.  E.   (Ga.)  90S  (1914). 


1^0  CORPORATE  CONTROL 

Membership  in  the  board  is,  as  a  rule,  a  necessary  qualifi- 
cation for  the  president  and  vice-president  of  a  corporation. 
They  are  almost  invariably  the  presiding  officers  of  the  board, 
and  when  this  is  the  case,  the  election  of  a  president  or  vice- 
president  not  a  member  of  that  body  might  lead  to  difficult 
situations. 

§117.    Powers  and  Duties  of  Officers 

The  mere  fact  of  election  to  office  does  not  necessarily 
in  itself  confer  any  power  or  duties  upon  the  officials  of 
a  corporation.^  Custom  or  usage  may  have  attached  certain 
powers  and  duties  to  certain  official  positions,  but  the  corpora- 
tion may  disregard  this  and  vary  the  powers  and  duties  of  the 
different  officers  as  seems  to  it  best. 

In  general  it  may  be  said  of  corporate  officials  that,  as 
agents  of  the  corporation,  they  are  governed  by  the  general 
law  of  agency.  Accordingly  a  corporate  official  has  only  those 
powers  which  are  conferred  upon  him  or  are  incidental  to  the 
exercise  of  these  powers. 

The  different  sources  from  which  the  powers  of  corporate 
officials  are  derived  are,  in  rank  of  their  authority,  (i)  the 
statutes  of  the  state,  (2)  the  charter,  (3)  the  by-laws,  (4) 
resolutions  of  directors,  and  (5)  usage. 

Statutory  provisions  affecting  corporate  officials  are  few. 
The  charter  likewise  but  seldom  contains  provisions  affecting 
the  officers  of  the  corporation,  though  occasionally  such  pro- 
visions are  inserted  therein  for  the  sake  of  permanence.  The 
by-laws,  however,  usually  prescribe  the  official  powers  and 
duties  with  fulness,  and  the  directors,  subject  to  the  provisions 
of  the  higher  authorities  referred  to,  confer  such  other  proper 
official  powers  and  prescribe  such  other  official  duties  as  they 
see  fit. 


aR.  R.  Co.  V.  Bayne,  ii  Hun  CN.  Y.)  i66;  affd.,  75  N.  Y.  i  (1877);  Cushman  v. 
Cleveland,  etc.,  Co.,  84  N.  E.  (Ind.)  75.9  (1908);  Emmet  v.  Northern  Bank,  173 
App.  Div.  (N.  Y.)  840  (1916);  Marqusee  v.  Ins.  Co.,  211  Fed.  9031  (1914). 


OFFICERS  131 

Beyond  all  these,  it  will  usually  be  found  that  the  officers 
transact  certain  routine  business*  and  perform  certain  duties 
as  a  matter  of  custom,  and  their  acts  are  valid  and  binding 
upon  the  corporation,  even  though  not  specifically  authorized.^ 

Also  it  may  be  stated  generally  that  whenever  the  directors 
permit  an  officer  to  exercise  apparent  authority  in  the  cor- 
porate affairs  or  transactions,  the  corporation  is  bound  thereby 
as  to  third  persons  as  fully  as  if  such  officer  had  been  duly 
authorized.^ 

Beyond  this,  corporate  officers  not  infrequently  act  clearly 
without  the  bounds  of  their  authority,  relying  upon  ratifica- 
tion of  their  acts  by  the  board  of  directors  later.  If  so  ratified, 
the  corporation  is  bound  and  the  officials  are  absolved  from 
all  responsibility  for  their  ultra  vires  acts.^  If,  however,  the 
official  action  is  not  ratified,  the  corporation  is  not  bound  and 
the  officers  are  personally  liable  for  their  acts.* 

The  validity  of  an  officer's  acts  depends  entirely  upon  his 
authority  and  not  on  the  place  in  which  the  authority  is  ex- 
ercised.* Therefore,  when  in  the  proper  discharge  of  his 
duties,  his  acts  are  as  effective  in  one  place  as  another  and 
equally  binding  upon  the  corporation. 

The  board  may  temporarily  delegate  the  powers  of  an 
official  to  another  person,  provided  such  delegation  is  reason- 
able and  only  for  such  length  of  time  as  may  be  actually 
necessary  to  conserve  the  interests  of  the  corporation.  An 
officer  cannot  delegate  his  powers  to  another  officer  in  any 
material  matter,  even  temporarily,  unless  specially  authorized 
thereto  by  the  by-laws  or  by  action  of  the  board.^^ 

*  Fitzgerald,    etc.,    Co.    v.    Fitzgerald,    137   U.    S.   98    (1890). 

«  Ins.  Co.  V.  McCain,  96  U.  S.  84  (1877)  ;  Story  on  Agency,  §§  126,  127.  ^,     , 

«New  York  &  New  Haven  R.  R.  Co.  v.  Schuyler,  34  N.  Y.  30  (1865.);  3  Clark 
&  Marshall  on  Corp.,  §708;  Louchheim  v.  Bldg.  Assn.,  ziv  Pa.  St.  499  (1905); 
Rankin   v.    Tygard,    iqS    Fed.    795    (1912)-  _       ,    ^  ,       ,       ^     ,, 

'Rolling  Mill  v.  R.  R.,  120  U.  S.  256  (1886);  Nims  v.  Boys'  School,  160  Mass. 
177  C1893);  Topolewski  v.    Plankinton   Packing  Co.,   143  Wis.   52  (1910). 

sMalone  v.  Pierce,  231.  Pa.  vSt.  534  (19");  Falls  City  Lumber  Co.  v.  Watkins, 
93  Ore.  212  (1909). 

0  Hastings  v.   Ins.   Co.,  138  N.   Y.  4713   (189.^)- 

10  Caldwell  v.  Life  Assn.,  53  App.  Div.  (N.  Y.)  24s  (190a).  As  to  when  corpora- 
tion will  be  bound,  see  Emerson  v.  Hat.  Co.,  12  Mass, .  237  (1815) ;  also  Luttrell  V. 
Martin,   112  N,   C.   593   (1893)- 


1^2  CORPORATE  CONTROL 

§  ii8.     Liabilities  of  Officers 

An  officer  contracting  for  his  corporation  within  the  limits 
of  his  authority  is  merely  a  corporate  agent,  and,  if  not  guilty 
of  fraud  or  deceit,  does  not  bind  himself  and  cannot  be  held 
personally  liable  in  any  way.  If,  however,  he  exceeds  his 
authority  he  renders  himself  personally  liable, ^^  unless  the  cor- 
poration later  ratifies  the  unauthorized  action,^^  in  which  case 
he  is  released. 

Officers  are  bound  to  use  ordinary  care  and  diligence  in  the 
conduct  of  the  corporate  business  and  are  therefore  liable  for 
any  losses  caused  by  their  neglect,  mismanagement,  or  wrong- 
doing in  the  discharge  of  their  official  duties,^^  though  not  for 
an  error  of  judgment.^* 

An  officer  is  also  personally  liable  for  any  wrong  he  does 
on  behalf  of  his  corporation,  such  as  sending  out  false  and 
deceptive  reports,  statements,  prospectus,  etc.,  even  though  the 
corporation  is  also  liable.^^ 

In  many  states  statutes  exist  prescribing  penalties  for 
various  misdeeds  of  corporate  officials.  Thus  in  New  York, 
neglect  to  make  proper  entries  in  the  stock  book,  or  to  exhibit 
this  book  on  request  to  those  entitled  to  its  inspection  involves 
a  penalty  of  $50  and  of  resulting  damages ;  rendering  a  false 
report  involves  liability  for  all  resulting  damages ;  loaning  cor- 
porate funds  to  a  stockholder  or  allowing  him  to  withdraw  his 
investment  in  any  way  renders  officers  and  directors  person- 
ally liable  for  all  debts  of  the  corporation  until  the  amount  is 
returned,  while  the  penalty  for  falsifying  accounts  or  erasing 
or  destroying  the  corporate  records  is  the  same  as  that  for 
forgery. 


"  See  citations  in  footnote  8. 

"  See  citations  in  footnote  7. 

133,  Cook  on  Corp.,  §702,  and  cases  there  cited;  McEwen  v.  Kelly,  140  Ga.  7.20 
(1913.) ;  United  Zinc  Cos.  v.  Harwood,  216  Mass.  474  (1914) ;  Childs  v.  White,  158 
App.   Div.    (N.   Y.)    I    (1913).      ,,    ^  ,  „    .     „       ,  ^     . 

"  Briggs  V.  Spaulding,  141  U.  S.  132  (1890);  People  v.  Equit.,  etc..  Society,  i^ 
App.  Div.  (N.  Y.)  714  (1908). 

« Cowley  V.    Smyth,  416  N.    J.    L.   380.  (1884) ;   Morgan  v.   Skiddy,  62  N.   Y.   319 

(1875). 


OFFICERS        .  133 

§119.     De  Facto  Officers 

A  de  facto  officer  is  one  actually  in  possession  of  an  office 
and  exercising  its  powers  and  duties  by  virtue  of  some  other 
authority  or  right  than  that  of  a  regular,  unquestioned  election 
or  appointment.  He  must  be  "distinguished  on  the  one  hand 
from  a  mere  usurper  of  an  office,  and  on  the  other  hand  from 
an  officer  de  jure,"^^  i.e.,  one  holding  his  position  by  legal 
right.  It  not  infrequently  happens  that  the  results  of  an  elec- 
tion are  disputed  or  that  an  election  is  not  held.  In  the  first 
case  if  the  officers  claiming  election  enter  upon  their  official 
duties,  or  in  the  second  case  if  the  old  officers  continue  in 
office,  the  acting  officials  are  de  facto  officers,  and,  until  ousted 
or  superseded,  their  official  acts  are  legal  and  binding  upon 
the  corporation. 

Speaking  generally  it  may  be  said  that  anyone  connected 
with  a  corporation  who  is  publicly  allowed  to  act  as  its 
officer  or  agent  is  a  de  facto  officer.  Persons  dealing  with 
the  corporation  cannot  usually  investigate  and  ascertain 
whether  those  who  purport  to  represent  it  are  legally  ap- 
pointed. The  law  therefore  holds  that  the  acts  of  these  de 
facto  officers  are  binding  on  the  company  even  though  they 
have  no  legal  right  to  the  position  they  pretend  to  hold. 

§  120.     Removals  and  Resignations 

When  an  officer  is  elected  for  a  definite  term  and  accepts 
the  office,  a  contract  has  been  made  for  that  term,  and,  unless 
power  has  been  given  the  board  by  express  provision  of  stat- 
utes, charter,  or  by-laws  to  remove  the  corporate  officers  at 
pleasure,  the  incumbent  can  be  legally  removed  only  for 
cause. ^^  If  a  removal  is  to  be  made,  the  cause  must  be  such 
as  will  justify  breaking  the  contract  with  the  offending  official, 
charges  must  be  brought  against  him,  and  he  must  be  allowed 


i«  Waterman  v.   Chicago,   etc.,   R.    R.   Co.,   139  HI-   658-665   (1892);   Merchants'   Bank 
V.   Citizens'   Gas   Light   Co.,    1159  Mass.   505    (1893'). 
"  State  V.   Kuehn,  34  Wis.  229  (1874). 


134  CORPORATE   CONTROL 

an  opportunity  to  defend  himself.^^  If  removed  without  cause, 
his  official  status  ceases  but  the  corporation  is  liable  to  him  for 
breach  of  contract. ^^ 

In  some  few  states  the  statutes  give  the  directors  power 
to  remove  officers  at  pleasure.  Elsewhere  it  may  be  given 
them  by  charter  or  by-law  provision.^"  Such  provisions  are 
usually  desirable  as  the  board  is  responsible  for  the  proper 
conduct  of  the  corporate  business  and  should  have  power  to 
remove  an  objectionable  official  without  the  necessity  of  a 
formal  trial.  When  by-laws  are  adopted  giving  the  directors 
power  to  remove  officers  without  cause,  they  do  not  authorize 
the  removal  of  officers  already  elected,  but  are  effective  as  to 
officers  elected  thereafter. 

Under  the  usual  conditions  of  election,  a  corporate  officer 
may  resign  at  will,^^  unless  he  has  entered  into  some  distinct 
agreement  to  serve  the  corporation  for  a  fixed  period.  It 
follows  that  acceptance  of  the  signature  of  an  officer  is  not 
necessary  unless  required  in  the  charter  or  by-laws.^^  His 
resignation  should,  as  a  rule,  be  in  writing,  be  phrased  to  meet 
the  exact  end  in  view,  and  be  delivered  to  the  secretary,^^ 
though  an  oral  resignation  in  open  meeting  is  sufficient,  especi- 
ally if  followed  by  acceptance  by  the  board. ^*  It  has  been  held 
that  all  the  corporate  officers  cannot  resign  at  once  for  the 
purpose  of  throwing  the  corporation  into  the  hands  of  a  re- 
ceiver,^^  or  to  free  themselves  from  their  obligations  in  regard 
to  the  custody  of  the  corporate  property.^® 


*8  State  V.  Adams,  44  Mo.  570,  5S5   (1869) ;  State  v.   Kuehn,  34  Wis.  299  (1874). 

^»In  re  Griffing  Iron  Co.,  63.  N.  J.  L.  168  (1899);  Brindley  v.  Walker,  70  Atl. 
Rep.    (Pa.)   794   (1908). 

*>  State  V.  Adams,  44  Mo.  570^  585  (1869);  Darrah  v.  Ice  &  Storage  Co.,  50  W.  Va. 
417    (1901);    Douglass   V.    Merchants'    Ins.    Co.,    118   N.    Y.    484    (1890). 

21  Yorkville  Bank  v.  Zeltner  B.  Co.,  80  App.  Div.  (N.  Y.)  578  (1903) ;  Van 
Amburgh   v.    Baker,   81    N.    Y.    46   (1880). 

2="  Fearing  v.  Glenn,  73  Fed.  116  (1896);  Will  of  McNaughton,  138  Wis.  179,  208 
(1909). 

*  Manhattan  Co.  v.  Kaldenberg,  165  N.  Y.  i  (1900) ;  Noble  v.  Euler,  20  App. 
Div.   (N.   Y.)   548  (T897). 

"  Briggs  V.  Spaulding,  141  U.  S.  13^-15.2  (1891) ;  Fearing  v.  Glenn,  713.  Fed.  116 
(1896). 

25  Zeltner  v.   Brewing  Co.,   174  N.   Y.   247  (1903). 

*»  Yorkville    Bank   v.    Zeltner    B.    Co.,   80   App.    Div.    (N.    Y.)    578   (1903). 


BOOK  II 
CORPORATE  ORGANIZATION 


Part  V— The  Charter 


CHAPTER   XV 
GENERAL    CONSIDERATIONS 

§121.     Nature  of  Charter 

The  foundation  of  the  corporation  is  a  formal  written 
grant  or  authorization  from  the  state.  This  instrument,  origi- 
nally known  as  the  charter,  is  now  usually  designated  by  the 
statute  laws  of  the  various  states  as  the  certificate  of  incor- 
poration or  the  articles  of  association.  From  a  legal  stand- 
point there  is  no  distinction  between  these  different  names. 
As  a  matter  of  convenience  the  term  charter  is  generally  em- 
ployed in  the  present  volume.  The  charter  may  be  granted 
by  a  particular  state,  or  by  the  general  government  as  in  the 
case  of  national  banks  and  certain  other  corporate  organiza- 
tions. It  is  a  recognized  principle  that  all  statutory  laws  of 
the  state  of  incorporation  governing  or  regulating  corporations 
become  a  part  of  the  charter.^ 

Formerly  every  charter  was  created,  or  authorized,  by  a 
separate  legislative  act.  Charters,  termed  special  charters,  are 
still  granted  in  some  states  by  act  of  legislature  for  special  cor- 
porations, but  the  greater  number  of  corporations  are  organ- 
ized under  state  laws  of  general  application.     (See  §  124.) 

All  corporations  have  certain  common  law  powers,  such 
as  the  right  to  sue  and  be  sued  under  the  corporate  name, 
the  right  to  contract  and  to  use  the  corporate  seal.     In  addi- 


1  Ellerman  v.    Railway    Co.,  49  N.   J.    Eq.   217   (1891);    Bixler  v.    Summerfield,    19.5 
111.   147   (1902);  Westport  Stone  Co.  v.  Thom&s,   175  Ind.  J19  (1910). 

137 


138  THE   CHARTER 

tion  they  have  any  general  powers  granted  by  the  statutes 
and  the  special  rights  granted  by  their  respective  charters, 
such  as  the  use  of  the  particular  name,  the  right  to  carry  on 
the  special  business  and  to  have  a  certain  capital  stock.  They 
also  have  such  incidental  powers  as  are  necessary  to  render 
these  express  powers  effective.  If  any  further  corporate 
powers  allowable  under  the  laws  of  the  state  of  incorporation 
are  desired,  they  must  be  secured  by  proper  amendment  of 
the  charter.  Their  exercise  otherwise  is  ultra  vires,  i.e.,  be- 
yond the  powers  of  the  company. 

As  the  charter  is  usually  a  very  formal  instrument,  and 
the  procedure  for  its  amendment  is  also  formal  and  usually 
troublesome,  it  is  important  that  all  desired  purposes  and 
powers  should  be  stated  with  clearness  and  fullness  in  the 
original  charter  application. 

The  powers  and  privileges  conferred  upon  a  corporation 
by  its  charter  are  only  such  as  are  allowable  under  the  laws 
of  the  state  of  incorporation.  Ordinarily  any  provisions  of 
a  different  tenor  would  be  refused  or  stricken  out  of  the 
charter  application  by  the  state  officials.  Occasionally  it 
happens,  however,  through  official  ignorance,  inadvertence,  or 
indifference,  that  powers  and  privileges  illegal,  or  not  per- 
missible, are  passed  and  apparently  granted  by  the  charter  of  a 
corporation.  Such  appearance  is  deceptive.  The  corporation 
is  empowered  by  its  charter  just  so  far  as  that  instrument  is  in 
accord  with  the  law  of  the  state  and  no  further.  The  charter 
is  not  and  cannot  be  superior  to  the  law,  and  is  absolutely 
ineffective  just  so  far  as  it  goes  beyond. 

It  must  be  noted  that  the  ordinary  business  corporation 
does  not  in  any  proper  sense  of  the  word  receive  a  franchise, 
as  the  granting  of  the  charter  does  not  give  it  any  powers  that 
will  not  be  freely  given  to  any  other  incorporation  upon  like 
application.     A  modern  charter  does  not  grant  a  franchise.^ 


*i   Machen  on  Corp.,  §§19,  20;  a  Morawetz  on  Corp.,   §925. 


GENERAL   CONSIDERATIONS  139 

§  122.     Classification 

Charters  are  divided  into  two  important  classes  by  the 
general  division  of  corporations  into  stock  and  non-stock  or 
membership  corporations.  Charters  for  membership  corpora- 
tions are  not  treated  specifically  in  the  present  volume. 

Beyond  this  general  division,  stock  corporations  and  the 
charters  creating  them  may  be  divided  into  three  important 
classes  as  follows: 

1.  Business  corporations,  organized  to  conduct  an  or- 

dinary mining,  mercantile,  manufacturing,  or  other 
private  business. 

2.  Public  utility  corporations,   organized  to  undertake 

some  public  function,  such  as  the  supply  of  heat, 
light,  power,  or  water,  or  the  construction  or  opera- 
tion of  a  railway,  a  telephone  or  telegraph  system. 

3.  Financial   corporations,   as   banks,    trust   companies, 

building  associations,  and  insurance  companies. 

The  corporations  of  each  of  these  classes  are  created  by 
charters  differing  from  those  of  the  other  classes  in  form  and 
terms,  though  all  conform  to  the  general  principles  governing 
charters.  The  characteristic  features  of  each  of  these  classes 
of  corporations  are  as  follows: 

I.  Business  Corporations 

This  term  is  used  to  designate  corporations  organized  to 
conduct  those  various  forms  of  private  business  not  subject 
to  special  regulations  and  restrictions  in  the  interest  of  the 
public.  All  corporations  for  mining,  manufacturing,  and 
mercantile  pursuits  are  included  under  this  head. 

Business  corporations  are,  as  a  rule,  chartered  in  each 
state  under  general,  uniform  laws  and  forms,  have  no  special 
privileges,  and,  when  incorporated,  are  allowed  to  pursue 
their  corporate  ends  almost  as  freely  and  as  simply  as  would 


I40 


THE   CHARTER 


a  private  individual  or  firm  under  the  same  circumstances. 
The  majority  of  existing  corporations  belong  to  this  class 
and  the  great  mass  of  corporate  law  and  decisions  applies 
to  them  primarily.  For  the  other  classes  of  stock  corpora- 
tions there  are  special  laws,  special  limitations,  and  in  some 
cases  special  privileges. 

2.  Public  Utility  Corporations 

Public  utility  or  public  service  corporations  are  those  or- 
ganized for  the  purpose  of  securing  and  operating  under  some 
franchise  of  a  public  nature,  which  confers  upon  such  cor- 
porations rights  or  privileges  which  other  citizens  and  private 
corporations  do  not  enjoy.  Usually  these  franchises  carry 
with  them  certain  rights  of  way,  or  condemnation  powers  to 
secure  such  rights  granted  by  the  state  under  its  power  of 
eminent  domain. 

An  ordinary  private  corporation  enjoys  no  exclusive  fran- 
chise of  this  nature,  and,  generally  speaking,  any  other  body 
of  citizens  may  incorporate  for  exactly  the  same  purposes  and 
carry  on  exactly  the  same  kind  of  business.  (§121.)  A  com- 
pany organized  to  operate  a  public  utility  must,  however,  have 
special  rights  and  powers  affecting  the  public  welfare  or  con- 
venience, and  usually  another  similar  corporation  would  not 
be  granted  these  identical  rights  and  powers  while  the  former 
corporation  was  in  active  existence.  For  instance,  a  gas  com- 
pany must  have  the  right  to  tear  up  streets  in  order  to  lay  and 
repair  its  pipes.  The  ordinary  citizen  or  corporation  has  no 
such  right.  If  such  right  were  granted  to  one  company,  the 
same  right  in  the  same  territory  would  not  properly  be  granted 
to  another  company.  Should  such  double  concession  be  made, 
it  would  be  but  a  short  time  until,  in  obedience  to  well-known 
economic  laws,  the  two  competing  companies  would  combine. 

This  peculiarity  is  true  of  all  classes  of  public  utility  cor- 
porations.    They  enjoy  franchises  that  cannot  be  granted 


GENERAL   CONSIDERATIONS  .      141 

indiscriminately,  and  that  tend  inevitably  to  monopoly.  They 
enjoy  these  special  privileges  for  the  purpose  of  supplying 
certain  public  needs  that  must  be  supplied  uniformly.  They 
cannot  be  given  the  liberty  to  make  prices  and  conditions  that 
obtains  in  the  conduct  of  a  private  corporation.  Hence,  the 
laws  under  which  they  receive  charters  should  guard  against 
the  indiscriminate  bestowal  of  such  rights  and  should  care- 
fully regulate  charges  and  methods. 

In  many  states  the  charters  of  public  utility  corporations 
are  granted  only  by  special  acts  of  legislation ;  in  others,  com- 
missions pass  upon  such  applications  and  decide  whether  the 
public  welfare  requires  the  issuance  of  the  desired  charter; 
while  in  other  states  such  corporations  are  chartered  under  the 
provisions  of  general  laws. 

J.  Financial  Corporations 

Experience  has  shown  that  it  is  unsafe  to  allow  irrespon- 
sible parties  to  incorporate  and  conduct  banks,  trust  companies, 
savings  institutions,  and  similar  associations  dealing  with  the 
funds  of  others.  Hence,  institutions  of  this  sort  are  now  so 
hedged  about  with  restrictions  and  limitations  that,  in  a  meas- 
ure at  least,  their  conduct  is  confined  to  reputable  and  responsi- 
ble people.  Their  safety  is  also  partially  assured  by  stringent 
rules  as  to  the  payment  of  stock  subscriptions  in  cash  before 
business  is  commenced,  and  as  to  the  liability  of  their  stock- 
holders thereafter.  In  national  banks  and  in  many  state  banks 
a  stockholder's  liability  is  equal  to  the  face  value  of  his  stock, 
thus  nominally  placing  $200  behind  each  $100  of  stock  as  se- 
curity for  the  deposits  and  other  liabilities  of  such  institutions. 
In  many  cases  this  extra  $100  is  paid  in  and  used  as  surplus. 

Usually  charter  applications  for  financial  corporations 
must  be  approved  by  some  department  or  official  of  the  state ; 
and  after  incorporation  their  affairs  are  subject  to  the  inspec- 
tion and  supervision  of  the  state  officials,  and  their  officers 


142 


THE   CHARTER 


are  required  to  make  regular  reports  of  their  business  and 
financial  condition.  National  banks  are  under  the  jurisdiction 
of  the  United  States  laws  and  are  not  subject  to  this  supervi- 
sion and  regulation  from  the  authorities  of  the  state  in  which 
they  operate. 

Speaking  generally,  both  public  utility  corporations  and 
financial  institutions  chartered  by  the  state  are  subject  to  the 
usual  statute  law  regulating  stock  corporations,  and  in  addi- 
tion to  such  special  legislation  as  may  affect  them.  If  doing 
business  in  other  states,  they  would  be  governed  by  the  local 
regulations  affecting  such  foreign  corporations. 

§  123.    Charter  Details 

When  a  corporation  is  to  be  organized,  all  the  important 
features  which  are  peculiar  to  the  new  corporation  and  which 
are  not  secured  to  it  by  the  common  law  or  are  necessarily 
incident  to  incorporation,  should  appear  in  its  charter.  These 
are  usually  the  name,  purposes,  duration,  location,  capitaliza- 
tion and  the  details  thereof ;  also  in  some  states  the  number  of 
directors  and  the  names  of  those  who  are  to  act  for  the  first 
year,  and  any  desired  special  provisions  that  can  be  made  a 
permanent  part  of  the  corporate  organization  under  the  laws 
of  the  state  of  incorporation.  Temporary  or  less  important 
details  may  be  left  for  by-law  or  other  regulation,  but  all  mat- 
ters of  permanence  or  importance  should  appear  in  the  charter 
as  far  as  possible.  The  statutes  usually  require  the  main  fea- 
tures outlined  above  to  appear  in  the  charter.  (See  Chapter 
LXI,  "Charter  Forms.") 

In  New  York,  New  Jersey,  and  some  other  states,  special 
provisions  may  be  inserted  in  the  charter  for  the  regulation 
and  conduct  of  the  corporate  business  and  affairs  and  for  any 
proper  limitations  on  the  powers  of  its  officials.  This  leaves 
wide  scope  for  the  insertion  of  such  provisions  and  many 
varying  arrangements  result  from  this  freedom. 


GENERAL   CONSIDERATIONS  143 

§  124.    Application  for  Charter 

Special  charters  are  prohibited  by  constitutional  provision 
in  a  number  of  states.  Where  not  prohibited  they  are  secured 
by  application  to  the  legislature.  In  such  case  the  charter  ap- 
plication is  put  in  the  form  of  an  act  declaring  that  certain 
named  parties  and  their  successors  are  a  body  corporate  for 
the  purposes  enumerated.  This  act,  if  passed  by  the  legisla- 
ture, becomes  the  charter  of  the  company  and  is  its  sole  au- 
thority for  existence  and  operation. 

The  granting  of  special  charters  is  a  source  of  grave 
abuses,  and  in  many  states,  as  already  said,  is  prohibited  by 
constitutional  provisions.  In  other  states,  however,  as  in  New 
York,  such  charters  are  still  granted,  and  charters  may  be 
secured  either  under  the  general  corporation  laws,  or,  where 
sufficient  influence  exists,  by  direct  appeal  to  the  legislature. 

In  all  the  states  general  laws  have  been  passed  prescribing 
the  method  whereby  charters  may  be  secured.  These  laws  are 
modified  by  special  additional  requirements  in  the  case  of 
financial  and  public  utility  corporations.  Under  the  provisions 
of  such  general  laws,  when  due  and  proper  application  is  made 
with  payment  of  the  proper  fees,  the  Secretary  of  State  must 
issue  a  charter  in  accordance  with  the  terms  of  the  application, 
or,  if  actual  issuance  of  the  charter  is  not  required,  the  official 
acceptance  and  filing  of  the  application,  ipso  facto,  authorizes 
the  parties  to  organize  as  a  corporation. 

This  is  the  usual  procedure  under  which  the  great  majority 
of  modern  business  corporations  come  into  existence*  It  is  a 
matter  of  right,  not  of  favor,  and  is  available  equally  for  all 
qualified  persons  who  choose  to  comply  with  the  necessary 
formalities  and  pay  the  required  fees. 


CHAPTER  XVI 

INCORPORATORS 

§  125.     Who  May  Incorporate 

Corporations  are  creatures  of  the  law.  They  derive  their 
right  to  existence  either  from  direct  legislative  enactment  or 
from  the  general  laws  under  which  they  are  formed.  There- 
fore only  those  may  incorporate  who  are  expressly  authorized 
thereto  by  these  special  acts  or  under  these  general  laws.  In 
each  state  the  status  must  be  consulted  in  order  to  ascertain 
definitely  just  who  may  participate  in  any  proposed  incorpora- 
tion. 

Usually  the  statutes  authorizing  incorporations  employ 
the  term  "persons"  or  ''natural  persons"  in  prescribing  who 
may  incorporate.  This  wording  excludes  a  firm,  a  corpora- 
tion, or  any  one  acting  in  a  representative  capacity.  Any  of 
these  might  hold  stock  in  the  corporation  when  organized,  but 
could  not  legally  act  as  an  incorporator.^ 

As  the  charter  is  in  effect  a  contract,  a  person  unable  to 
contract  cannot  properly  act  as  an  incorporator.  This  is  a 
matter  of  common  law  and  excludes  minors,  persons  of  un- 
sound mind  and  others  similarly  incompetent  to  contract. 
Under  the  old  common  law  it  would  also  exclude  married 
women,  but  this  disability  has  been  generally  removed  and 
married  women  frequently  act  as  incorporators. 

In  some  states  one  or  more  of  the  incorporators  must  be 
citizens  of  the  state  of  incorporation.  Unless  this  is  expressly 
prescribed,  any  person  otherwise  competent  can  act,  whether 
a  citizen  of  the  state  or  not.     Incorporators  need  not  even  be 


^  Schwab   V.    Potter,    194,    N.    Y.    409,   416    (1909) ;    Converse   v.    Emerson,   Talcott 
&    Co.,    148   111.    App.    604   (1909). 

144 


INCORPORATORS  I45 

citizens  of  the  United  States  unless  expressly  required  by  the 
statutes.  In  New  York,  at  least  one  of  the  incorporators 
must  be  a  resident  of  the  state,  and  two-thirds  of  the  total 
number  must  be  citizens  of  the  United  States.  In  New  Jersey 
none  of  the  incorporators  need  be  citizens  either  of  the  state 
or  of  the  United  States. 

It  must  be  borne  in  mind  that  each  state  has  the  entire 
right  to  impose  any  qualifications  on  incorporators  that  its 
legislators  deem  desirable,  and  that  there  is  no  appeal  from 
such  statutory  requirements.  Usually,  however,  the  matter 
is  not  of  great  importance,  as,  if  any  of  the  proposed  incor- 
porators are  barred  by  statute  requirements,  a  substitute  may 
be  appointed  who  is  qualified,  and  who  will  act  up  to  such 
point  as  is  necessary  or  desirable  and  then  transfer  his  sub- 
scription and  all  his  rights  to  the  party  for  whom  he  has  been 
acting.  This  utilization  of  "dummy"  incorporators  is  a  com- 
mon procedure.     (See  §  129.) 

§  126.    Number  of  Incorporators 

In  every  state  the  minimum  number  of  incorporators  is 
prescribed  by  statute.  In  most  states  this  minimum  is  three, 
though  in  a  few  states  five  are  required.  No  maximum  num- 
ber is  designated  in  any  state,  this  feature  being  a  matter  of 
no  importance  from  the  standpoint  of  the  state. 

As  a  general  rule  it  is  advisable  to  incorporate  with  the 
minimum  number  of  incorporators  permitted  by  the  statutes. 
Usually  each  incorporator  must  sign  and  acknowledge  the 
charter  application,  and  must  either  sanction  or  participate  in 
the  first  meeting,  and  these  proceedings  are  much  facilitated 
by  a  small  number  of  incorporators.  At  times  different  inter- 
ests must  be  represented  in  an  incorporation  and  the  subsequent 
organization,  and  a  considerable  number  of  incorporators  is 
therefore  unavoidable,  but  without  some  such  reason  the  mini- 
mum number  is  to  be  preferred. 


14^ 


THE   CHARTER 


§  127.     Functions  of  Incorporators 

The  incorporators  furnish  the  nucleus  about  which  the 
new  corporation  is  formed,  and  are  the  active  agents  in  bring- 
ing it  into  existence.  They  are  essential  participants  in  the 
formalities  incident  to  the  creation  of  the  corporation.  They 
must  usually  sign  and  acknowledge  the  charter  and  are  gener- 
ally required  to  be  subscribers  to  the  stock  of  the  corporation. 
They  call  and  conduct  the  first  meeting.  The  organization  of 
the  corporation  is  usually  entirely  in  their  hands,  though  in 
case  they  are  not  the  real  parties  in  interest,  i.e.,  are  "dummy" 
incorporators  acting  for  others,  the  organization  and  first  pro- 
ceedings will  be  prescribed  for  them  in  advance. 

It  will  be  seen  that  the  only  necessary  function  of  the  in- 
corporators is  to  figure  in  certain  formalities  incident  to  the 
formation  of  the  new  corporation.  They  may  be  the  real 
parties  in  interest  who  will  remain  with  and  own  stock  in  the 
new  corporation,  or  they  may  be  "dummy"  incorporators, 
called  in  merely  as  a  matter  of  convenience  or  for  more  cogent 
reasons,  without  interest  in  the  corporation  beyond  their  per- 
functory subscription  for  one  or  more  qualifying  shares — an 
interest  that  is  usually  assigned  to  the  real  parties  in  interest 
so  soon  as  the  corporation  is  once  organized  and  ready  to  be- 
gin its  operations.     (See  §  129.) 

§  128.     Incorporators  as  Stockholders 

It  is  usual  for  incorporators  to  be  subscribers  for  one  or 
more  shares  of  stock  in  the  proposed  corporation.  In  most  of 
the  states,  such  subscription  is  either  required,  or  it  is  assumed 
that  such  subscription  will  be  made.  If  not  either  directly  or 
inferentially  required  by  the  statutes,  such  subscription  is  not 
essential. 

When  an  incorporation  is  effected  with  incorporators  who 
do  not  desire,  or  are  not  desired,  to  remain  as  permanent  stock- 
holders, it  is  usual,  after  the  organization  has  been  completed. 


INCORPORATORS 


147 


for  the  incorporators  to  assign  their  subscription  rights  or  their 
stock  to  those  parties  who  are  to  be  the  real  owners  of  the 
corporation.  These  latter  assume  the  obligations  of  the  incor- 
porators on  the  assigned  subscriptions  of  stock,  and,  if  the 
transaction  is  acquiesced  in  by  the  corporation,  it  is  then  legally 
complete  and  the  original  incorporators  are  in  most  states 
discharged  from  any  subscription  obligations  either  to  the  cor- 
poration or  to  corporate  creditors.^ 

§  129.     Dummy  Incorporators 

As  has  been  stated,  any  competent  person  may  join  in  an 
incorporation  without  any  material  or  permanent  interest  in 
the  matter,  and  such  non-interested  or  "dummy"  incorporators 
are  frequently  employed.  Sometimes  this  is  done  where  the 
real  parties  in  interest  do  not  deem  it  advisable  to  appear  as 
incorporators ;  sometimes  of  necessity  because  of  the  absence 
of  the  principals;  and  sometimes  purely  as  a  matter  of  con- 
venience, the  real  parties  concerned  being  disinclined  or  too 
busy  to  imdertake  themselves  the  technical  duties  of  incorpo- 
rators. 

In  such  cases  the  dummy  incorporators  execute  the  char- 
ter and  organize  the  corporation,  usually  subscribing  for  the 
smallest  number  of  shares  that  will  satisfy  the  statute  re- 
quirements, and  carrying  the  organization  to  such  point  as  the 
real  parties  in  interest  or  their  attorneys  indicate.  The  "dum- 
mies" then  assign  their  subscription  rights  or  stock,  resign  any 
official  positions  they  may  hold  in  the  new  corporation,  and 
step  down  and  out. 

Such  an  incorporation,  if  properly  conducted,  is  entirely 
legal,  and  the  method  is  that  pursued  in  the  formation  of  al- 
most all  the  larger  corporations  and  combinations.  The  pro- 
ceedings are,  as  a  matter  of  course,  supervised  and  ordinarily 
conducted  by  the  attorneys  of  the  parties  really  interested, 

*  I  Cook  on  Corp.,  §  255  and  cases  cited. 


148 


THE   CHARTER 


these  attorneys  dictating  all  that  is  done  and  seeing  that  the 
interests  of  their  clients  are  properly  conserved.  The  pro- 
ceeding is  carried  as  far  as  the  conditions  render  advisable 
before  the  dummy  incorporators  make  way  for  their  princi- 
pals. Usually  they  fully  complete  the  organization  of  the 
corporation,  electing  themselves  directors  and  officials,  or  per- 
haps electing  to  the  official  positions  the  parties  who  are  to 
be  permanent  incumbents.  Meanwhile  they  usually  take  action 
of  the  greatest  moment  to  the  future  of  the  new  organization. 

The  organization  of  the  United  States  Steel  Corporation 
was  effected  in  this  way.  Three  incorporators  were  provided, 
each  of  whom  subscribed  for  ten  shares  of  stock  out  of  a  total 
capitalization  of  but  $3,000.  As  soon  as  the  organization  of 
the  new  corporation  was  completed,  the  incorporators  were 
retired,  the  real  parties  in  interest  came  in,  and  the  capitaliza- 
tion was  increased  to  $1,100,000,000. 

In  such  cases  the  incorporators  are  usually  the  junior 
counsel  and  clerks  in  the  offices  of  the  attorneys  having  the 
incorporation  in  charge.  As  stated,  if  the  incorporators  are 
properly  qualified  and  the  proceedings  are  conducted  in  ac- 
cordance with  the  statutory  requirements,  there  is  no  qviestion 
as  to  the  legality  of  the  use  of  dummy  incorporators,  even 
where  properties  of  large  value  are  taken  over  for  the  corpora- 
tion by  these  irresponsible  parties. 


CHAPTER   XVII 

THE    CORPORATE    NAME 

§  130.     How  Secured 

The  name  of  the  proposed  corporation  must  be  set  forth 
specifically  in  its  charter  application.  This  name,  so  soon  as 
the  application  is  allowed,  becomes  the  name  and  property  of 
the  new  corporation.  In  the  state  of  incorporation  the  right 
to  such  name  is  exclusive. 

If  the  desired  name  were  the  same  as  that  of  some  other 
domestic  corporation  or  foreign  corporation  licensed  to  do 
"business  within  the  state,  or  so  nearly  the  same  as  to  cause 
confusion,  that  fact  alone  would  be  ground  for  the  rejection 
of  the  charter  application. 

But  few  statutory  restrictions  exist  in  regard  to  the  cor- 
porate name.  The  prohibition  against  the  adoption  of  a 
name  similar  to  that  of  a  corporation  already  doing  business 
under  the  state  laws  is  the  most  important.  In  some  states 
the  prefix  *'The"  must  be  used  to  introduce  the  corporate 
appellation ;  in  some  states  "Corporation,"  "Company,"  "Asso- 
ciation," or  some  other  word  expressing  the  idea  of  corporate 
association  must  be  used  in  the  corporate  name.  In  some  few 
states,  the  word  "Incorporated"  or  "Limited"  must  follow  the 
corporate  designation.^  In  New  York  every  corporation  must 
use  such  word  or  words,  abbreviations,  affix,  or  prefix  as  will 
distinguish  it  from  a  natural  person,  firm,  or  copartnership. 

In  most  of  the  states  insurance  and  moneyed  corporations, 
and  in  many  states  co-operative  corporations,,  must  be  organ- 
ized under  special  statutes,  and  in  these  states  the  statutes 


*  !•  Machen  on  Corp.,  §  449  and  notes. 

149 


I^O  THE   CHARTER 

usually  provide  that  the  corporation  not  organized  under  the 
special  laws  shall  not  use  the  words  "Trust,"  **Bank,"  **Insur- 
ance,"  "Co-operative,"  and  like  words  in  their  corporate  titles. 
The  state  authorities  would  have  no  right  to  refuse  a 
charter  application  on  the  ground  that  some  foreign  corpora- 
tion not  licensed  by  the  state  is  using  the  selected  name.  In 
such  event  the  charter  application,  if  no  other  objection  ex- 
isted, must  be  allowed,  leaving  the  right  to  use  the  name  to 
be  settled  between  the  two  corporations. 

§  131.     Selection  of  Name 

The  selection  of  the  corporate  name  is  frequently  a  matter 
of  considerable  importance,  though  usually  governed  by  busi- 
ness considerations  rather  than  legal  rules.  As  a  matter  of 
both  taste  and  business,  a  name  should  be  selected  that  is  dis- 
tinctive, not  too  long,  and,  if  possible,  expressive  of  the  busi- 
ness to  be  done  by  the  corporation.  The  selected  name  should 
not  be  fraudulent  or  misleading,  nor  should  it  infringe  on  the 
rights  of  others.^ 

In  the  incorporation  of  a  partnership,  the  general  usage 
is  to  retain  the  partnership  name  with  only  such  changes  as 
will  indicate  the  corporate  organization.^ 

In  most  states  great  latitude  is  allowed  in  the  selection 
of  the  corporate  name,  the  prohibition  against  conflicting 
names  being  practically  the  only  restriction.  If  not  required 
by  statute,  the  use  of  the  prefix  "The"  is  to  be  avoided  as 
unnecessarily  lengthening  the  name  and  producing  a  pecu- 
liarly awkward  effect  in  legal  instruments  when  the  name  is 
used  following  the  word  "said,"  as  is  frequently  the  case. 

Hackneyed  names  such  as  "Standard,"  "Excelsior," 
"Union,"  etc.,  as  well  as  much-used  geographical  names,  are 
to  be  avoided,  both  as  a  matter  of  taste  and  business.     No 


•i   Machen   on  Corp.,   §450;   Von   Thodorvich  v.    Beneficial  Assn.,   154  Fed.   911 
(1907). 


THE   CORPORATE   NAME  I5I 

trade-name  rights  can  ordinarily  be  secured  in  such  well-worn 
designations.^  But  the  fact  that  the  distinctive  and  similar 
feature  of  two  names  consists  of  a  combination  of  geographi- 
cal names  does  not  deprive  the  first  user  of  the  right  to  pro- 
tection.* 

§  132.     Right  to  Corporate  Name 

One  important  object  of  incorporation  is  to  secure  per- 
manence, and  the  corporate  name  is  an  almost  essential  ele- 
ment of  this  desired  commercial  continuity.  Once  established, 
the  name  is  the  embodiment  of  the  good- will  of  the  enterprise 
and  has  a  value  in  accordance.  If  the  corporation  is  prop- 
erly managed  and  is  successful,  this  value  is  frequently  very 
considerable.  In  some  instances  it  is  the  chief  asset  of  a 
prosperous  business. 

The  corporation's  right  to  its  name  is  the  same  as  to 
any  other  trade-mark  or  trade-name  possessed  by  it,  and  is 
generally  more  easily  established.  If  the  name  is  used  by 
other  parties  without  authority,  such  use  may  be  stopped  by 
injunction,  and,  if  damage  can  be  shown,  an  action  will  lie 
against  the  offending  parties.^  The  same  rule  applies  whether 
the  infringement  is  by  another  corporation  or  by  the  adoption 
of  a  trade-name  by  an  individual  or  partnership.®  A  corpora- 
tion cannot  take  the  name  of  an  existing  copartnership,  where 
this  would  result  in  injury  to  the  partnership.  If  it  does 
take  such  a  name  it  may  be  enjoined.^ 

As  has  been  stated,  there  is  usually  no  statute  restriction 
against  the  adoption  of  the  name  of  a  foreign  corporation 


'Columbia  Mill  Co.  v.  Alcorn,  150  U.  S.  460  (1893);  Corning  Glass  Works  v.  Corn- 
ing Cut  Glass  Works,  197   N.   Y.    1712  (1900).  _.       ^^t    -.r  v    ^ 

*Kavser  &  Co.  v.  Italian  Silk  Underwear  Co.,  160  App.  Div.  (N.  Y.)  607  (1914) ; 
British-American    Tobacco    Co.    v.    British- American    Cigar    Stores    Co.,    21  n    Fed.    933 

^^^^Higgins  Co.  V.  Higgins  Soap  Co.,  144  N.  Y.  462  (1895);  Corning  Glass  Works 
V.  Corning  Cut  G)ass  Co.,  197  N.  Y.  173  (1910) ;  Salvation  Army  v.  Am.  Salvation 
Army,  135  A.  D.  (N.  Y.)  268  (1909).  ,  ,^  ^  r.-       ,xt    v  n       <  ^        a 

«  German-Amer.  Button  Co.  v.  Heymsfeld,  170  App.  Div.  (N.  Y.)  416  (1915)- 

7  Pettes  v.  Am.  W.  C.  Co.,  89  A.  D.  (N.  Y.)  345  (1903). 


1^2  THE   CHARTER 

by  a  domestic  corporation  if  such  foreign  corporation  has 
not  been  licensed  to  operate  in  the  state.  The  allowance 
of  such  name  would  not,  however,  give  the  new  corporation 
an  unquestioned  right  to  its  use.  If  the  older  corporation 
could  show  that  it  had  a  trade  right  in  the  name,  and  that 
the  use  of  the  name  by  the  new  corporation  would  be  injuri- 
ous to  this  right,  and  would  permit  it  to  compete  unfairly, 
the  new  corporation  might  be  enjoined  from  the  use  of  such 
name,  and,  if  the  injunction  should  be  sustained,  would  be 
compelled  either  to  secure  a  new  name  by  due  and  formal 
procedure  or  to  discontinue  its  operations.^ 

In  New  York  a  foreign  corporation  will  be  refused  ad- 
mittance to  the  state  on  the  ground  that  another  corporation  is 
doing  business  under  the  same  or  a  similar  name ;  but  in  North 
Carolina,  under  a  ruling  of  the  Attorney  General,  foreign  cor- 
porations will  not  be  excluded  from  the  state  because  another 
corporation  is  already  doing  business  under  the  same  name.^ 

Where  confusion  in  delivery  of  mail  results  from  simi- 
larity of  corporate  names,  the  courts  favor  the  corporation 
that  first  lawfully  used  the  name.^" 

§  133.     Changing  the  Corporate  Name 

Occasionally  it  becomes  necessary  or  expedient  to  change 
the  corporate  name.  It  may  be  that  the  use  of  the  name  first 
adopted  is  prevented  by  injunction,  or  new  interests  may 
have  come  in,  that  as  a  matter  of  business  policy  must  be  rep- 
resented in  the  corporate  name,  or  possibly  the  corporation 
has  been  unsuccessful  or  has  achieved  a  bad  reputation,  and  the 
adoption  of  a  new  name  is  thought  desirable.  In  any  such 
case,  the  name  may  usually  be  changed  but  only  with  the 
permission  and  sanction  of  the  state.      In  many  states  the 

81  Machen  on  Corp.,  §459;  Benevolent  Order  of  Elks  v.  Improved  Benevolent 
Order,  etc.,  205  N.  Y.  459  (1912) ;  Hoevel  Sandblast  Machine  Co.  v.  Hoevel  S.  M.  Co. 
of  N.  Y.,  Inc.,  167  App.  Div.   (N.  Y.)  54«  (1915). 

»Atty.  Gen.'s  opinion.  Biennial  Report,  I9ii3ri4,  p.  92. 

»  Central  Trust  Co.  v.  Central  Trust  Co.  of  111.,  149  Fed.  7^  (1906). 


THE   CORPORATE   NAME 


153 


change  of  name  must  be  secured  by  an  amendment  to  the 
charter,  which  is  a  more  or  less  troublesome  operation  accord- 
ing to  the  statutory  requirements  of  the  particular  state. 
Other  more  or  less  troublesome  proceedings  obtain  in  differ- 
ent states,  as  in  New  York  where  formerly  the  only  method  of 
changing  the  corporate  name  was  by  formal  court  proceedings. 
The  formalities  incident  to  a  change  of  corporate  name 
are  so  great  that  in  some  cases  it  is  simpler  and  no  more  ex- 
pensive to  organize  a  new  corporation  and  transfer  to  it  the 
assets  of  the  existing  corporation,  than  to  take  the  time  and 
trouble  incident  to  a  change  of  name  by  the  regular  procedure. 
In  such  a  case,  from  the  legal  standpoint  the  old  company 
has  ceased  to  exist  and  a  new  company  has  become  into  exis- 
tence. A  mere  change  of  name,  on  the  other  hand,  does  not 
affect  the  identity  of  the  corporation." 


"  Allen  V.  M.  E.  Church,  127  Iowa  96  (1905) ;  N.  B.  Lumber  Co.  v.  Sims  &  White, 
157  Ala.  595  (1908);  Carlon  v.  City  Savings  Bank,  8a  Neb.  58a  (1908). 


CHAPTER   XVIII 
THE  CORPORATE  PURPOSES 

§  134.     General 

An  individual  or  firm  may  do  anything  or  engage  in  any 
form  of  business  not  prohibited  by  the  laws.  A  corporation, 
on  the  contrary,  may  do  only  those  things  and  engage  in  those 
businesses  permitted  it  by  the  law  and  set  forth  in  its  charter. 
This  renders  it  important  that  the  charter  should  clearly  and 
fully  empower  the  corporation  to  do  all  those  permissible 
things  that  may  be  necessary  in  its  operations. 

Usually  the  general  corporation  laws  in  each  state  specify 
the  purposes  for  which  corporations  may  be  organized.  In 
some  states  these  purposes  are  limited  to  certain  classes  of 
pursuits,  and  corporations  cannot  be  formed  for  purposes  not 
specifically  included.  Mining  and  manufacturing  corpora- 
tions are  authorized  in  all  states.  In  most  states  the  laws 
specify  mercantile  and  trading  corporations  as  well.  Some 
states  go  still  further  and  broadly  authorize  the  formation  of 
corporations  for  "any  lawful  business,"  "any  lawful  industry 
or  pursuit,"  or  for  "pecuniary  profit." 

Under  these  latter  clauses  it  would  be  difficult  to  discover 
any  legitimate  calling  or  pursuit  that  could  not  be  undertaken 
by  a  corporation.  The  tendency  of  the  present  day  is  towards 
liberality  in  this  respect  and  the  few  limitations  that  do  exist 
are  gradually  being  removed. 

§  135.     Single  Purpose 

Formerly  the  rule  was  to  organize  corporations  for  a 
single  purpose,  as  to  mine  for  copper,  to  manufacture  shoes, 

154 


THE  CORPORATE  PURPOSES 


155 


or  to  conduct  a  trading  business  in  some  specified  line.  The 
authorization  for  this  one  purpose  would,  as  a  matter  of 
course,  carry  the  right  with  it  to  do  all  things  necessary  or 
proper  to  effect  that  purpose,  but  nothing  further.  If  another 
line  of  business  were  to  be  taken  up,  a  new  corporation  must 
be  organized,  as  the  powers  of  the  old  corporation  could 
not  be  extended  to  cover  the  new  pursuit.  That  is,  if  the 
members  of  the  copper  mining  company  wished  to  mine  for 
the  precious  metals  also,  they  could  not  secure  specific  author- 
ization thereto  for  the  old  company,  but  must  organize  a  new 
company  for  the  purpose. 

This  rule  is  now  almost  abrogated.  In  a  few  states  it  is 
still  the  law  and  a  corporation  will  not  be  chartered  for  more 
than  one  purpose,  but  generally  a  corporation  will  be  em- 
powered for  as  many  legitimate  purposes  as  may  be  included 
in  the  charter  application.  In  some  few  cases,  however,  it 
is  still  advantageous  to  confine  the  corporate  activities  to  one 
specific  purpose.  For  instance,  if  a  partnership  is  incorpo- 
rated, it  may  be  advisable  to  restrict  it  to  the  purposes  of  the 
business  already  under  way.  This  would  prevent  any  subse- 
quent diversion  of  the  corporate  activity  and  resources  into 
other  and  possibly  dangerous  channels.  The  corporation 
could  conduct  the  one  business  and  that  alone.  It  would  have 
no  power  to  venture  into  new  and  untried  fields. 

§  136.     Comprehensive  Purposes 

At  the  present  time  the  tendency  in  corporate  organiza- 
tion is  towards  comprehensive  purposes — purposes  that  will 
permit  the  corporation  to  undertake  and  operate  any  line  of 
business,  in  any  part  of  the  world,  and  under  any  conditions. 
It  is  the  natural  desire  to  secure  all  powers  and  privileges 
that  may  be  had — not  that  they  are  all  needed  or  are  to 
be  exercised,  but  unforseen  opportunities  may  occur  when 
these  powers  will  be  required.    Incorporators  are  pleased  with 


156  THE   CHARTER 

these  extensive  arrays  of  possible  activities,  investors  and  in- 
terested parties  generally  expect  them,  and,  as  their  inclusion 
is  a  matter  of  little  difficulty,  nearly  all  modern  charters  enu- 
merate almost  every  conceivable  branch  of  business  and  every 
kind  of  enterprise  allowable  under  the  statutes. 

In  some  cases  this  has  been  carried  to  an  absurd  extreme, 
but  in  general  the  practice  has  its  advantages.  There  is  no 
good  reason  why  corporations  should  not  have  the  same  free 
range  of  business  activities  possessed  by  the  individual  or  firm, 
and  the  effort  of  the  present  day  is  to  approximate  as  nearly 
as  may  be  to  this  ideal. 

It  is  to  be  noted,  however,  that  this  end  could  be  attained 
with  equal  efficiency  and  with  much  less  trouble  and  verbosity 
by  a  few  general  statements  of  comprehensive  scope.  In  most 
cases  all  the  purposes  of  the  most  elaborately  extended  charter 
could  be  obtained  in  their  full  force  and  efficiency  by  a  few 
well-turned  phrases. 

§  137.     Illegal  Purposes 

No  state  of  the  Union  allows  the  organization  of  a  corpo- 
ration for  illegal  or  immoral  purposes.  Where  state  officers 
inadvertently,  or  by  intent,  allow  charters  for  such  purposes, 
the  authorization  of  these  charters  is  void  and  ineffective  and 
will  not  protect  the  stockholders  from  any  penalties  and  liabili- 
ties that  would  be  visited  upon  the  members  of  a  partnership 
engaged  in  similar  undertakings. 

This  would  apply  to  any  business,  occupation,  or  organiza- 
tion in  direct  violation  of  the  laws  of  the  state  of  incorpora- 
tion, such  as  lotteries,  gambling,  and  combinations  in  restraint 
of  trade.^ 

Apart  from  these  manifestly  illegal  or  immoral  undertak- 
ings,  any  purposes  not   allowed   to   corporations   under  the 


1  Peabody  v.  Gas  Trust  Co.,  130  111.  268  (1889);  McGrew  v.  City  Produce  Exchange. 
86  Tenn.  57^  (1886). 


THE   CORPORATE   PURPOSES  IC7 

laws  of  the  state  are  illegal.  A  charter  for  any  such  purpose, 
even  if  allowed  by  the  state  officials,  would  be  ineffective  and 
the  stockholders  would  be  held  as  partners  in  case  of  the  in- 
solvency of  the  enterprise.  This  does  not  often  happen  at  the 
present  day,  as  most  of  the  states  allow  incorporation  for  all 
proper  purposes  and  the  possibility  exists  only  in  those  states 
where  corporate  purposes  are  still  restricted.^ 

Also  it  is  to  be  noted  that  if  some  of  the  purposes  are 
legitimate  and  proper  and  some  unauthorized,  the  charter  is 
good  as  to  the  legitimate  portions  but  is  held  non-effective  and 
non-existent  in  those  portions  unauthorized  or  in  conflict  with 
the  laws.  The  laws  cannot  be  added  to  or  be  overridden  by 
a  charter  provision.^ 

§  138.     Things  "Ultra  Vires" 

Things  otherwise  legal  but  not  specified,  or  implied,  among 
the  charter  powers  of  the  corporation  are  beyond  its  powers, 
or  ultra  vires.  Contracts  made  in  pursuance  of  such  un- 
authorized ends  cannot  be  enforced  against  others,  although 
the  corporation  itself  is  usually  bound.  Directors  and  officers 
may  make  themselves  personally  liable  either  to  the  corpora- 
tion, to  its  stockholders,*  or  to  third  persons,  for  involving  the 
corporation  in  such  transactions.^ 

Both  creditors  and  stockholders  have  the  right  to  object 
to  any  action  of  the  corporation  exceeding  its  legal  powers. 
If,  however,  the  stockholders  assent  and  there  are  no  cred- 
itors, there  is  no  one  to  object  to  the  exercise  of  powers  not 
authorized  by  its  charter,  and  the  corporate  powers  may  be 
exceeded  without  danger  to  the  officers  and  directors. 


2Amer.  Tntst  Co.  v.  R.  R.  Co.,  157  111.  64T  (1895,);  Oregon  R.  R.  Co.  v.  Ore- 
g-onian  Ry.  Co.,  130  U.  S.  i  (1888);  Johnson  v.  Northern  Trust  Co.,  265  111.  2^  (1914). 

sPeabody  v.  Gas  Trust  Co.,  130  111.  268  (1889);  Straacke  v.  Routledge,  175  S.  W. 
(Tex.)  444  (1915)- 

*  Greenfield  Savings  Bank  v.  Abercrombie,  211  Mass.  252  (1912) ;  McKinnon  v. 
Morse  et  al.,  177  Fed.  S76  (1910). 

*  3  Clark  &  Marshall  on  Corp.,  §  744d.  See,  however,  Linkhauf  v.  Lombard,  13.7  N. 
Y.  417  (1893). 


158 


THE   CHARTER 


Owing  to  the  broad  powers  that  are  now  usually  granted, 
the  doctrine  of  ultra  vires  has  much  less  importance  than  for- 
merly.   A  modern  text-book  says: 

"The  old  theory  of  a  corporation  was  that  it  could  not 
legally  do  anything  in  excess  of  its  express  or  implied  powers. 
But  the  modern  view  is  that  a  private  corporation  may,  if 
all  its  stockholders  assent  and  if  creditors  are  paid.  Public 
policy  does  not  require  business  corporations  to  confine  them- 
selves strictly  within  the  limits  of  the  words  of  their  char- 
ters."« 


"  Cook  on  Corp.,    §  3.     See  also  64  L.   R.  A.,  3/66  et  seq.   on  implied  powers  of 
corporations. 


CHAPTER   XIX 

STOCK  CLAUSES 

§  139.     General 

In  most  states  the  capital  stock  of  a  corporation  and  the 
divisions  and  general  features  of  this  capital  stock  must  be 
stated  in,  and  are  fixed  by,  the  charter.  In  a  few  states,  stock 
with  preferences  or  other  special  features  may  be  issued  after 
the  allowance  of  the  charter;  by  specified  action  of  the  stock- 
holders, but  as  a  general  rule  everything  relating  to  the  stock 
is  fixed  once  for  all  by  the  charter  and  may  be  changed  there- 
after only  by  an  amendment  of  that  instrument. 

Usually  the  charter  states  the  full  amount  of  the  capital 
stock,  its  division  into  common  and  preferred  stock  if  such 
division  exists,  the  number  of  shares  into  which  it  is  divided, 
and  the  par  value  of  each  share.  The  par  value  is  usually  the 
same  for  all  the  shares,  though  not  necessarily  so,  unless  re- 
quired by  statute  as  in  California.  The  par  value  of  the  com- 
mon stock  might  be  fixed  at  $10  per  share,  while  the  par 
value  of  the  preferred  stock  was  fixed  at  $100.  Generally 
such  variations  of  the  par  value  are  not  advisable. 

§  140.     Classifications 

Any  classifications  of  the  stock  should  be  very  clearly  set 
out  in  the  charter.  These  classifications  are  varied  and  nu- 
merous. The  most  usual  is  that  of  common  and  preferred 
stock.  This  preferred  stock  may  be  divided  into  different 
classes  as  to  precedence  in  dividends,  or  as  to  amount  of 
dividend,  or  as  to  participation  in  assets,  or  as  to  redemption 
features,  or  as  to  participation  in  dividends  beyond  preferred 
dividends,  or  as  to  voting  or  other  powers. 

159 


igo  THE   CHARTER 

The  common  stock  is  sometimes  classified  in  regard  to 
voting  powers,  each  portion  or  class  having  the  right  to  elect 
a  certain  number  of  directors,  or  at  times  one  portion  of  the 
common  stock  may  be  given  the  sole  right  to  vote  upon  certain 
kinds  of  questions  or  under  certain  contingencies. 

Such  charter  classifications  are  not  allowable  in  all  of  the 
states,  but  the  same  result  may  be  attained  in  many  cases  by 
suitable  by-law  enactments  unanimously  adopted  at  the  first 
meeting  of  stockholders.  As  stated  by  Judge  Folger  in  Kent 
V.  Quicksilver  Mining  Co.,  78  N.  Y.,  159,  178  (1879): 

"We  know  nothing  in  the  constitution  or  the  law  that  in- 
hibits a  corporation  from  beginning  its  corporate  action  by 
classifying  the  shares  in  its  capital  stock,  with  peculiar  privi- 
leges to  one  share  over  another,  and  thus  offering  its  stock  to 
the  public  for  subscriptions,  thereto."^     (See  §§  65,  166.) 

§  141.     Common  Stock 

Usually  the  charter  provisions  affecting  common  stock 
are  few  and  simple.  For  example,  if  a  corporation  is  to  be 
capitalized  at  $100,000,  with  shares  of  the  par  value  of  $100, 
without  preferred  stock  or  classifications  of  the  common  stock, 
the  charter  would  merely  state  that  the  capital  stock  is  to  be 
$100,000,  divided  into  1,000  shares  of  the  par  value  of  $100 
each.  Nothing  more  would  be  necessary.  The  fact  that  it 
was  all  common  stock,  that  this  was  unclassified,  and  that 
there  was  no  preferred  stock  or  restrictions  of  any  kind  on 
the  common  stock,  would  be  understood  without  specific 
statement. 

If  there  are  to  be  any  classifications  of  the  common  stock 
or  any  restrictions  upon  it  in  any  way,  these  must  be  stated  in 
the  charter  specifically  and  in  detail.  The  mere  fact  that  com- 
mon stock  is  usually  unrestricted  renders  it  the  more  necessary 
to  be  clear  and  explicit  if  restrictions  are  to  be  created. 


*  Burke  v.  Gas  and  El.  Co.,  123  Pac.   (Kans.)  857  (1912)1  Page  v.  Whittenton  Mfg. 
Co.,  g/f  N.  E.  (Mass.)  1006  (1912). 


STOCK   CLAUSES  l6i 

§  142.    Preferred  Stock 

Preferred  stock,  by  its  mere  existence,  indicates  the  fact 
that  it  has  features  not  possessed  by  other  stock  of  the  corpo- 
ration, but  the  differences  and  preferences  which  distinguish 
it  should  be  stated  as  clearly  as  possible  in  the  creating  clause, 
and  so  concisely,  if  it  may  be  done,  that  the  entire  clause  may 
be  printed  on  the  face  of  the  preferred  stock  certificates. 

It  should  be  borne  in  mind  that  unless  otherwise  provided 
by  the  charter,  preferred  stock  has  all  the  rights  of  common 
stock  in  addition  to  its  preference;  that  is,  it  would  vote,  par- 
ticipate in  any  dividends  in  excess  of  its  preferential  divi- 
dend, participate  in  any  distribution  of  assets  on  the  dissolu- 
tion of  the  corporation,  and  generally  be  on  exactly  the  same 
plane  as  common  stock  except  as  to  the  indicated  preference  in 
dividends.  If  any  of  these  rights  are  to  be  denied  it,  such  de- 
nial must  be  clearly  expressed.  If  it  is  to  have  any  rights 
other  than  its  preference  dividends,  these  rights  must  also  be 
clearly  indicated.  Nothing  should  be  left  to  implication,  or 
be  taken  for  granted.     (See  Chapter  IX,  *Tref erred  Stock.") 


CHAPTER  XX 
LOCATION  AND  DURATION  OF  CORPORATIONS 

§  143.     Domestic  and  Foreign  Corporations 

In  its  own  state — the  state  in  which  it  is  incorporated — 
a  corporation  is  a  "domestic  corporation."  Elsewhere  it  is 
designated  a  "foreign  corporation."  In  its  own  state  it  usu- 
ally enjoys  rights  and  privileges  not  accorded  a  foreign  cor- 
poration; hence,  unless  there  is  some  strong  reason  to  the 
contrary,  it  should  always  be  incorporated  in  the  state  in 
which  the  larger  part  of  its  business  is  to  be  done. 

§  144.    Selection  of  State 

The  usual  inducements  for  foreign  incorporation  are  the 
smaller  fees  and  taxes  of  the  selected  state.  (See  Chapter  VI, 
"Cost  of  Incorporation.") 

Unless  there  is  a  material  difference  in  favor  of  foreign 
incorporation,  it  should  be  avoided.  Corporations  organized 
outside  the  state  are  always  liable  to  adverse  discrimination, 
and  in  many  states  are  at  a  positive  disadvantage  in  event  of 
litigation.     (See  Chapter  V,  "Where  to  Incorporate.") 

§  145.    Principal  Office 

Usually  the  location  of  the  office  in  which  the  corporation 
is  to  have  its  headquarters  must  be  designated  in  the  charter 
application.  In  New  Jersey  and  most  of  the  other  states,  this 
principal  office  must  be  located  definitely.  In  New  York,  the 
borough  and  county  in  which  the  principal  office  may  be  found 
must  be  given,  but  neither  then  nor  later  is  any  more  definite 
address  required.     This  renders  it  impossible  to  secure  the 

162 


LOCATION   OF   CORPORATIONS  163 

local  address  of  a  corporation  from  its  charter — a  seemingly 
serious  omission.  The  weight  of  authority  is  that  the  location 
of  the  principal  place  of  business  stated  in  the  charter  is  con- 
clusive for  the  purposes  of  taxation,^  jurisdiction  of  federal 
courts,^  and  other  purposes.^ 

It  is  a  general  principle  of  law  that  stockholders'  meet- 
ings must  be  held  within  the  state  of  incorporation,  and  the 
principal  office  in  that  state  is  usually  designated  by  the  by- 
laws as  the  place  where  such  meetings  are  to  be  held.  One 
or  two  states,  by  statute  provision,  permit  stockholders'  meet- 
ings to  be  held  outside  the  state,  but  the  practice  though  con- 
venient in  some  cases  is,  generally  speaking,  objectionable. 

In  the  absence  of  any  statutory  provision  on  the  subject, 
it  is  generally  held  that  directors  may  hold  meetings  and 
transact  business  outside  the  state  of  incorporation.*  In  New 
York  a  contrary  ruling  was  made,  but  it  is  now  provided  by 
statute  that  if  meetings  of  the  board  of  directors  of  a  cor- 
poration organized  under  the  Business  Corporation  Law  are 
to  be  held  only  within  the  state,  the  certificate  of  incorpora- 
tion or  by-laws  must  so  provide.^  Of  course,  if  prohibited  by 
statute,  meetings  of  the  board  of  directors  cannot  be  held  out- 
side the  state,  and  action  taken  at  such  meetings  will  be  void.^ 

Permission  for  directors'  meetings  outside  the  state  is 
given  by  the  statutes  of  several  of  the  states  besides  New 
York,  and,  used  under  proper  regulations  as  to  place  and 
notice,  such  meetings  are  at  times  of  much  advantage.  When 
directors  are  especially  authorized  to  meet  outside  of  the  state 
there  is,  of  course,  no  question  as  to  the  legality  of  their  actions 
at  such  meetings/ 


1  Union  Steamboat  Co.  v.  City  of  Buffalo,  82  N.  Y.  jgn  (1880);  Loyd's  Execu- 
torial Trustees  v.  City  of  Lynchburg,  113  Va.  drj  (1912). 

2  Lemon  v.  Imperial  Window  Glass  Co.,  199  Fed.  927  (1912). 
^  In  re  Federal  Contracting  Co.  212  Fed.  688  (1914). 

*2  Machen  on  Corp.,  §  1462  and  cases  cited;  Handley  v.  Stutz,  139  U.  S.  417 
(1891);  Boatmen's  Bank  v.  Gillespie,  209  Mo.  217,  256  (1908). 

^  X.    Y.    Bus.    Corp.    Law,    §  2. 

«  Hilles  V.  Parrish,  14  N.  J.  Eq.  38a  (i86a) ;  Place  v.  People,  192  111.  160  (1901). 

'  Saltmarsh  v.  Spaulding,  147  Mass.  224  (1888) ;  Ormsby  v.  Copper  Co.,  56  N  Y. 
623  (1874). 


i64 


THE   CHARTER 


Meetings  of  both  stockholders  and  directors  are  usually- 
held  in  the  principal  office  in  the  state  of  incorporation.  To 
allow  meetings  of  either  stockholders  or  directors  to  be  called 
elsewhere,  unless  in  places  formally  designated  by  the  by-laws 
or  agreed  to  by  all  parties  in  interest,  gives  opportunity  for 
grave  abuses.  The  by-laws  should  designate  the  principal 
office  and,  unless  there  is  good  reason  for  doing  otherwise, 
prescribe  that  all  corporate  meetings  be  held  therein. 

The  principal  office  in  the  state  of  incorporation  is  usually 
designated  by  the  statutes  as  the  place  where  legal  process 
may  be  served  on  the  corporation. 

§  146.     Duration 

In  some  states  corporate  existence  is  limited  to  a  fixed 
period,  as  twenty  or  fifty  years.  In  most  of  the  states,  how- 
ever, the  duration  of  a  corporation  may  be  made  nominally 
perpetual.  This  unrestricted  duration  is  advantageous  and 
is  in  line  with  the  greater  liberality  manifested  towards  cor- 
porations in  later  years.  No  serious  objection  can  be  urged 
against  it,  the  reincorporations  necessary  in  the  short  period 
states  are  avoided,  and  the  general  stability  of  the  corporation 
is  improved. 

Where  corporate  existence  is  limited  by  statute,  the  ex- 
treme statutory  period  is  usually  selected  with  the  expecta- 
tion of  a  reincorporation  at  its  ends.  At  times,  limited  periods 
are  preferred  for  the  corporate  existence  in  order  definitely  to 
limit  the  period  of  the  association  undertaking.  In  such  case, 
at  the  end  of  the  selected  term  the  corporation  expires  by  lim- 
itation, its  assets  are  distributed,  and  the  corporate  venture 
is  terminated.  Usually  such  distribution  is  made  under  some 
prearranged  plan  in  order  to  avoid  the  losses  and  injury  to 
good-will  of  a  forced  liquidation. 


CHAPTER    XXI 

THE    BOARD    OF    DIRECTORS 

§  147.     Qualifications 

At  common  law  it  was  not  required  that  directors  should 
be  stockholders.  In  most  states  of  the  Union  this  has  been 
modified  by  statute  provisions  requiring  that  directors  hold 
one  or  more  shares  of  stock.  Such  provisions  do  not  apply, 
unless  expressly  so  stated,  to  directors  named  in  or  ap- 
pointed by  the  charter.  In  New  York  the  statute  requiring 
directors  to  be  stockholders  may  be  waived  by  proper  charter 
or  by-law  provision,  and  persons  not  stockholders  may  then 
be  selected  as  directors  of  the  corporation. 

In  general  it  is  very  advisable  that  directors  should  be 
stockholders  of  the  corporation  in  which  they  act,  and  the 
liberality  of  the  laws  in  permitting  persons  who  are  not  stock- 
holders, or  who  hold  but  one  or  two  shares,  to  act  as  directors, 
is  not  in  the  best  interests  of  stockholders.  Occasionally  the 
privilege  may  be  advantageous,  but  as  a  general  rule  the  man- 
agement of  a  business  enterprise  cannot  safely  be  placed  in 
the  hands  of  those  having  no  material  interest  in  its  success, 
and  the  incorporation  of  an  enterprise  does  not  exempt  it  from 
this  rule. 

In  most  states,  the  statutes  require  that  one  or  more  of 
the  directors  be  residents  of  the  state  of  incorporation.  In 
such  cases,  where  the  parties  really  interested  reside  in  other 
states  than  the  one  selected  for  incorporation,  resident  direc- 
tors must  be  secured.  In  some  states,  as  New  Jersey,  Maine, 
and  South  Dakota,  this  has  led  to  the  organization  of  con- 
cerns whose  sole  business  is  supplying  of  resident  directors 

165 


l65  THE   CHARTER 

and  the  representation  of  outside  corporations  organized  with- 
in the  state.  At  times  this  has  the  very  unexpected  result 
of  giving  some  dummy  director  the  deciding  vote  as  between 
two  equally  divided  factions  of  the  board.  A  recent  statute 
in  New  York  makes  the  added  requirement  that  at  least  one 
of  the  directors  shall  be  a  citizen  of  the  United  States. 

Unless  debarred  by  some  statutory  prohibition,  anyone 
capable  of  acting  as  an  agent  of  a  corporation  may  act  as 
a  director.  A  trustee,  or  an  executor  of  an  estate  consisting 
in  part  of  stock,  would  be  eligible  as  a  director.  Under  the 
modern  statutes  removing  their  disabilities,  married  women 
may  act  as  directors.  Unless  expressly  prohibited  by  statute, 
aliens  may  act  as  directors. 

§  148.     Number 

Some  limitation  upon  the  number  of  directors  is  usually 
imposed  by  the  statutes.  The  exact  number  within  these  limits 
is,  in  most  states,  fixed  by  the  charter.  In  practically  all  the 
states  a  minimum  number  of  directors  is  fixed  by  the  statutes, 
though  in  many  no  maximum  number  is  prescribed. 

In  general  the  membership  of  the  board  should  be  fixed 
at  the  lowest  number  that  will  permit  due  representation  of 
the  various  interests  involved  and  provide  for  the  proper 
transaction  of  business.  In  small  or  close  corporations  it  is 
usual  to  select  the  minimum  number  of  directors  permitted 
by  the  statutes.  In  the  larger  corporations  more  directors  are 
usually  necessary  in  order  that  all  the  interested  parties  may 
be  represented,  or  in  order  that  all  the  parties  really  concerned 
in  the  management  of  the  corporation  may  participate  in  the 
deliberations  and  actions  of  the  board.  Frequently  the  board 
is  increased  far  beyond  the  needs  of  management  in  order  to 
secure  names  that  will  attract  investors  and  add  to  the  financial 
stability  of  the  corporation  or  benefit  it  in  other  ways. 

If  the  number  of  directors  is  made  too  large  it  is  difficult 


THE   BOARD   OF   DIRECTORS  167 

to  secure  a  quorum,  meetings  are  apt  to  become  infrequent  and 
perfunctory,  the  members  of  the  board  do  not  keep  in  touch 
with  its  business,  and  some  further  device  must  be  resorted  to 
for  the  real  conduct  of  the  business.  Under  such  circum- 
stances the  management  is  sometimes  left  in  an  irregular  way 
to  the  officers  and  a  few  actively  interested  directors ;  usually, 
however,  the  difficulty  is  met  by  the  appointment  of  an  ex- 
ecutive committee,  to  which  is  sometimes  added  a  finance 
committee  and  upon  occasion  other  special  committees.  These 
committees  then  exercise  the  powers  of  management  that  usu- 
ally pertain  to  the  board.  (See  §  152;  also  Chapter  XXIX, 
"Standing  Committees.") 

For  the  business  operations  of  an  ordinary  corporation  a 
board  of  five  or  seven  members  actually  in  control — three  or 
four,  respectively,  forming  a  quorum — is  far  better  than  a 
larger  board  in  nominal  control  but  with  special  committees 
doing  the  real  work. 

§  149.     Authority 

The  stockholders  are  the  owners  of  the  corporate  prop- 
erty, but  the  direct,  active,  and  immediate  control  rests  with 
the  board  of  directors.  The  authority  of  the  board  exists 
under  the  common  law,  extends  to  all  subjects  connected  with 
the  management  of  the  corporate  affairs,  and,  unless  in  some 
way  restricted,  is  practically  supreme.  Its  actions  in  the  con- 
duct of  the  corporate  business  cannot  be  questioned  or  inter- 
fered with  by  the  stockholders  unless  in  case  of  gross  mis- 
management or  actual  fraud. 

"The  property  of  a  corporation  is  not  subject  to  the  control 
of  individual  members,  whether  acting  separately  or  jointly. 
They  can  neither  encumber  nor  transfer  that  property,  nor 
authorize  others  to  do  so.  The  corporation — the  artificial 
being  created — holds  the  property,  and  alone  can  mortgage  or 
transfer  it,  and  the  corporation  acts  only  through  its  officers, 


l68  THE   CHARTER 

subject  to  the  conditions  prescribed  by  law/'^  As  far  as  the 
corporate  management  is  concerned,  the  stockholder's  posi- 
tion is  but  little  more  than  that  of  an  interested  spectator.^ 

If  such  unrestrained  power  in  the  hands  of  the  board  is 
considered  undesirable,  it  may  usually  be  restricted  by  charter 
provision  or  by-law  regulations.  In  a  few  states  certain  re- 
strictions— and  in  some  cases  extensions — of  the  power  of 
directors  are  found  in  the  statutes. 

Where  special  charter  provisions  are  permissible,  any 
desired  restrictions  upon  the  power  of  the  board  should  be 
incorporated  in  the  charter.  If  this  is  not  possible  they  may 
usually  be  embodied  in  the  by-laws,  where  they  are  equally 
effective  but  lack  stability,  as  by-laws  are  easily  changed. 

By  either  of  these  methods  the  power  of  the  board  to 
incur  obligations  may  be  limited ;  their  power  to  sell  the  assets 
of  the  corporation  may  be  restricted ;  it  may  be  required  that 
two-thirds  or  other  proportion  of  the  entire  number  must 
concur  in  all  expenditures  above  a  certain  amount;  the  pay- 
ment of  excessive  salaries  may  be  prohibited;  expenditures 
within  a  certain  period  may  be  limited ;  and  many  other  restric- 
tions, depending  upon  the  particular  conditions,  may  be  im- 
posed.   (See  §§  io8,  159,  225.) 

§  150.     Power  to  Pass  By-Laws 

The  board  of  directors  have  no  power  to  pass  by-laws,  or 
to  amend  existing  by-laws,  unless  expressly  authorized  thereto 
by  the  statute  law  of  the  state,  the  charter  of  the  corporation, 
or  its  by-laws.  Where  special  provisions  cannot  be  included 
in  the  charter,  the  only  method  of  giving  the  directors  power 
to  amend  the  by-laws  is  by  express  by-law  provision.  The 
stockholders  may  legally  delegate  their  power  in  this  manner. 

*  Justice  Field  in  Humphreys  v.  McKissock,  140  U.  S.  304,  512  (1890). 

'2  Cook  on  Corp.,  §§709,  712;  3  Clark  &  Marshall  on  Corp.,  §6913;  Sellers  v. 
Greer,  172  111.  S49  (1898):  Ellerman  v.  Ry.  Co.,  49  N.  J.  Eq.  217  (1891) ;  Humphreys  v. 
McKissock,  140  U.  S.  304  (1890) ;  Denver  Engineering  Works  v.  Elkins,  179  Fed.  92a 
(19C9). 


THE  BOARD   OF   DIRECTORS 


169 


It  may  be  advisable  that  the  board  shall  have  power  to 
pass  additional  by-laws  to  meet  new  situations  and  emergencies 
as  they  arise,  and,  where  this  is  so,  the  desired  power  may  be 
given  them  by  an  authorization  to  supplement  the  by-laws 
adopted  by  the  stockholders.  This  is  as  far  as  is  prudent.  To 
place  unrestricted  power  to  make  and  amend  the  by-laws  in 
the  hands  of  the  board  would  seem  a  dangerous  and  unnec- 
essary removal  of  one  of  the  most  important  safeguards  of  the 
corporate  form. 

In  the  smaller  corporations  where  a  stockholders'  meet- 
ing may  be  readily  called  in  case  of  an  emergency,  there  would 
seem  to  be  no  real  object  or  advantage  in  giving  the  board  any 
power  whatsoever  over  the  by-laws.  In  the  larger  corpora- 
tions that  power  should  only  be  granted  with  caution  as  one 
that  is  of  but  occasional  utility,  and  that  may  be  used  to  the 
disadvantage  of  the  general  corporate  interests.    (See  §  170.) 

§151.     Classification 

The  classification  of  directors  in  such  manner  that  but  a 
portion  of  the  board  is  elected  at  any  one  annual  meeting,  is  at 
times  a  convenient  and  advantageous  arrangement.  Its  object 
is  to  prevent  the  sudden  alterations  of  membership  and  policy 
which  are  always  possible  where  the  entire  board  is  elected 
at  one  time,  and  also  to  render  the  selection  of  desirable 
members  more  probable  by  lessening  the  number  to  be  elected 
at  any  particular  time. 

It  is  to  be  noted  that  the  classification  of  directors  is  but 
seldom  necessary  where  cumulative  voting  prevails,  as  the 
sudden  change  of  the  entire  board  that  might  otherwise  result 
from  a  passing  of  the  control  of  the  stock  of  a  corporation 
is  then  hardly  possible.  In  the  smaller  corporations  classifi- 
cation of  directors  is  but  rarely  desirable  and  is  not  often 
found. 

The  most  common  classification  of  directors  is  the  division 


I^o  THE   CHARTER 

of  the  board  into  three  classes  equal  in  number,  each  class 
holding  for  three  years,  and  one  class  being  elected  each  year. 
Under  this  plan  three  years  are  required  for  a  complete  change 
of  the  personnel  of  the  board. 

Classification  of  directors  is  attainable  in  almost  every 
state.  Where  permissible,  such  classification  should  be  pro- 
vided for  in  the  charter.  Where  special  provisions  are  not 
allowed  in  the  charter,  it  may  usually  be  secured  by  by-law 
provision.  Unless  actually  prohibited  by  the  statutes  or  pre- 
cluded by  implication,  such  classification  may  be  secured  by 
either  charter  or  by-law  provision. 

It  is  unusual  to  provide  for  more  than  three  classes  of  di- 
rectors, and  such  classified  board  should  preferably  consist  of 
some  number  that  will  permit  three  equal  divisions,  as  three, 
nine,  or  fifteen.  The  classes  might  be  made  unequal,  that  is, 
if  the  board  consisted  of  eleven  members,  three  might  be 
elected  one  year,  four  the  next  year,  and  four  the  third.  Such 
arrangement  is,  however,  not  common. 

Upon  the  organization  of  a  corporation  with  a  classified 
board  the  whole  number  of  directors  are  usually  elected  at 
once,  the  term  or  class  of  each  director  being  decided  by  some 
agreed  method.  For  instance,  in  a  board  of  nine  members, 
divided  into  three  equal  classes,  the  three  directors  receiving 
the  highest  number  of  votes  might  constitute  the  longest  term 
class,  the  three  receiving  the  next  highest  number  of  votes 
the  class  for  the  intermediate  term,  and  so  on.     (See  §  196.) 

It  is  to  be  noted  that  the  stability  of  management  sought 
by  classification  of  directors  may  be  secured — and  at  times 
even  more  efiiciently  and  conveniently — ^by  the  creation  of  a 
voting  trust.     (See  Chapter  LII,  "Voting  Trusts.") 

§  152.    Standing  Committees 

The  board  of  directors  is  the  managing  body  of  a  corpo- 
ration and  supposed  to  be  in  direct  charge  of  its  affairs.  When 


THE   BOARD   OF   DIRECTORS 


171 


the  board  is  of  moderate  size  this  direct  supervision  is  usually 
exercised,  but  when  the  directors  are  numerous  it  is  not  always 
practicable,  and  standing  committees  are  then  usually  em- 
ployed.    (See  Chapter  XXIX,  "Standing  Committees.") 

These  committees  are  appointed  or  elected  in  such  manner 
as  may  be  prescribed  by  charter  or  by-laws,  must  be  composed 
of  members  of  the  board  of  directors,  and,  subject  to  the  pro- 
visions by  which  they  are  created  and  empowered,  usually  ex- 
ercise all  the  powers  of  the  board  in  their  respective  fields. 

Any  necessary  number  of  these  committees  may  be  ap- 
pointed, but  they  are  usually  limited  to  two — the  executive 
committee  and  the  finance  committee — the  first-named  com- 
mittee exercising  its  powers  over  the  general  affairs  of  the 
corporation,  while  the  powers  of  the  last-named  committee 
are  usually  confined  to  matters  relating  to  finance. 


CHAPTER   XXII 

SPECIAL  PROVISIONS 

§  153.    General 

The  first  general  laws  relating  to  incorporations  were 
harsh.  Only  one  purpose  was  allowed,  the  privileges  granted 
were  few,  and  all  corporations  were  to  be  organized  and  oper- 
ated on  exactly  the  same  lines.  Only  one  mold  was  provided, 
and,  if  this  did  not  happen  to  fit  the  needs  of  any  particular 
corporation,  relief  could  be  had  only  by  recourse  to  a  special 
charter  or  enabling  act. 

These  narrow  and  unnecessary  limitations  were  slowly 
and  grudgingly  relaxed,  but  no  marked  advance  was  made 
until  New  Jersey  recognized  the  necessity  of  greater  freedom 
and  flexibility,  and  also  perceived  the  very  material  advan- 
tages that  might,  accrue  to  the  state  itself  from  more  liberal 
corporate  legislation.  Her  legislators  then  proceeded  to  re- 
model the  bare  laws  existing  at  that  time,  so  as  to  allow  a 
plurality  of  purpose,  all  proper  special  powers,  and  a  freedom 
and  convenience  not  theretofore  enjoyed  by  corporations 
formed  under  general  laws.  To  this  politic  concession  to  the 
reasonable  business  demands  of  the  times  is  principally  due 
the  repute — and  resulting  revenue — which  New  Jersey  en- 
joyed and  still  enjoys  as  a  state  for  incorporation. 

The  greater  scope  and  freedom  of  action  of  New  Jersey 
corporations  under  the  new  law  was  mainly  due  to  its  ex- 
press recognition  of  special  charter  provisions.  The  right  to 
include  such  provisions  in  the  charter  is  conferred  by  the 
following  clause  from  the  statute: 

'The  certificate  of  incorporation  may  also  contain  any 
provision  which  the  incorporators  may  choose  to  insert,  for 

172 


SPECIAL   PROVISIONS  173 

the  regulation  of  the  business  and  for  the  conduct  of  the 
affairs  of  the  corporation,  and  any  provision  creating,  defin- 
ing, Hmiting  and  regulating  the  powers  of  the  corporation, 
the  directors  and  the  stockholders,  or  any  class  or  classes  of 
stockholders ;  provided  such  provision  be  not  inconsistent  with 
this  act."^ 

This  enables  the  incorporators  to  secure  through  charters 
granted  under  the  general  laws,  powers,  privileges,  and  regu- 
lations formerly  possible  only  under  special  charters.  This 
statute  has  been  followed  in  Delaware,  to  a  certain  extent  in 
New  York,  and,  with  more  or  less  variation,  in  a  number  of 
other  states. 

In  those  states  in  which  special  charter  provisions  are  not 
allowed,  many  of  the  desired  powers,  restrictions,  or  regula- 
tions may  be  obtained  through  by-law  provisions.  In  some 
matters  and  under  some  circumstances  this  may  be  done  effec- 
tively, but  usually  the  by-laws  may  be  amended  or  repealed 
with  comparative  ease,  and  their  provisions  do  not  always 
have  the  necessary  permanence. 

Where  the  statutes  do  not  permit  special  charter  provi- 
sions, and  desired  provisions  cannot  be  properly  or  perma- 
nently included  in  the  by-laws,  the  only  recourse  is  to  incor- 
porate in  some  more  liberal  state  where  such  provisions  are 
permitted.  The  corporation  would  thereafter  operate  in  its 
own  state  as  a  foreign  corporation.  Outside  incorporation 
for  such  a  purpose  would  be  justified  only  where  the  special 
provisions  obtained  were  of  considerable  importance. 

§  154.    Usual  Objects  of  Special  Provisions 

Many  of  the  corporate  features  already  discussed,  such 
as  cumulative  voting,  classification  of  directors,  and  limita- 
tions of  the  directors'  power  of  incurring  obligations,  are  fre- 


1  Laws  of  1896  (N.  J.),  Ch.  185,  §  8,  p.  280,  as  amended  by  Laws  of  1898,  Ch.  172, 
408. 


174 


THE   CHARTER 


quently  best  secured  by,  and  are  common  as,  special  charter 
provisions.  In  addition  to  these  are  many  other  provisions 
designed  to  meet  the  varying  requirements  of  particular  in- 
corporations, such  as  limitations  on  the  voting  power,  limi- 
tations on  salaries,  and  provisions  authorizing  a  reserve  fund 
or  the  accumulation  of  operating  capital,  etc. 

In  the  different  states  the  variation  of  the  statute  laws 
as  to  special  charter  provisions  is  wide.  Thus  in  some  states 
such  provisions  are  not  provided  for  and  are  therefore  not 
permissible  at  all;  while  in  other  states  almost  any  desired 
provision  is  permitted  in  the  charter.  In  New  Jersey  by 
charter  provision  the  directors  may  be  empowered  to  alter, 
amend,  or  repeal  by-laws,  while  in  New  York  the  exact  power 
of  the  board  as  to  by-laws  is  laid  down  in  the  statute  law, 
and  cannot  be  denied  or  modified  in  any  way  by  charter 
provisions.  Again  in  New  Jersey  the  directors  may  be  em- 
powered by  the  charter  to  mortgage  any  or  all  of  the  cor- 
porate property  without  consulting  the  stockholders;  but  in 
New  York  the  corporate  property  may  be  mortgaged  only 
with  the  consent  of  two-thirds  of  the  stockholders  of  the 
corporation,  and  any  charter  provision  to  the  contrary  would 
be  absolutely  non-effective.  The  New  Jersey  courts  have 
held  that  a  provision  in  the  charter  of  a  corporation  that 
any  resolution  in  writing  signed  by  all  of  the  members  of 
the  board  of  directors  should  have  the  same  effect  as  if  passed 
at  a  duly  called  meeting,  is  void,  because  inconsistent  with 
the  provisions  of  the  General  Corporation  Law.^  On  account 
of  this  wide  difference  it  is  necessary  to  consult  the  statutes 
when  any  special  provisions  are  under  consideration. 

§  155.     Cumulative  Voting 

Cumulative  voting  is  one  of  the  most  common  and  one 
of   the   most   important   of   special   charter   provisions.      Its 

'  Audenried  v.  East  Coast  Milling  Co.,  68  N.  J.  Eq.  4S0  (1904)- 


SPECIAL   PROVISIONS 


175 


usual  purpose  is  the  protection  of  minority  interests  by  secur- 
ing to  these  interests  representation  on  the  board  of  directors. 

As  its  name  indicates,  cumulative  voting  is  a  system  or 
method  of  cumulating  or  concentrating  votes.  Under  it  the 
owner  of  stock  is,  for  each  share  of  stock  he  owns,  entitled 
to  as  many  votes  for  directors  as  there  are  directors  to  be 
elected,  and  at  any  election  of  directors  may  cast  these  votes 
pro  rata  among  all  the  directors  to  be  elected,  or  all  for  one 
director,  or  may  distribute  them  among  two  or  more  as  he 
sees  fit.  That  is,  if  the  total  number  of  directors  to  be  elected 
is  seven,  the  owner  of  one  share  of  stock  might  cast  one  vote 
for  each  of  the  seven  directors,  or  might  cast  seven  votes  for 
one  director,  or  cast  four  votes  for  one  director  and  three  for 
another,  or  apportion  his  seven  votes  in  any  other  way  he 
chose  among  the  candidates. 

Under  this  arrangement  it  is  obvious  that  even  a  small 
minority,  by  combining  on  one  candidate,  may  secure  repre- 
sentation on  the  board.  At  times  this  representation  becomes 
of  much  importance.  If  the  minority  are  not  represented, 
they  are  debarred  from  information  of  what  the  majority 
propose  to  do.  Under  such  conditions  action  may  be  taken 
which  cannot  be  undone,  but  which  the  minority  might  have 
prevented  by  injunction  or  other  means  had  they  been  in- 
formed in  time.  Also  the  mere  presence  of  a  capable  minority 
representative  on  the  board  prevents  many  abuses  of  power 
that  might  otherwise  occur.  For  this  and  other  reasons, 
cumulative  voting  is,  from  the  minority  standpoint,  always  a 
wise  provision  and  occasionally  becomes  a  matter  of  the  most 
vital  importance. 

Cumulative  voting  may,  in  many  states,  be  secured  by 
proper  provision  in  the  charter  and  in  Colorado  the  charter 
must  provide  whether  or  not  cumulative  voting  shall  be 
allowed.  In  Pennsylvania,  South  Dakota,  West  Virginia, 
and  a  number  of  other  states  it  is  mandatory  without  refer- 


1/6 


THE  CHARTER 


ence  to  any  charter  provisions.  In  Nevada  it  is  mandatory 
unless  the  charter  provides  otherwise.  In  a  few  states  it 
is  doubtful  whether  the  provision  would  be  allowed  in  the 
charter  or  would  be  effective  if  included.      (See   §   424.) 

§  156.    Classification  of  Stock 

Where  special  charter  provisions  are  allowed,  classifica- 
tion of  stock  is  common.  Stock  may  be  classified  in  many 
ways.  The  most  usual  of  these  are  the  division  of  the  capital- 
ization into  common  and  preferred  stock;  division  of  the 
preferred  stock  into  classes,  as  first,  second,  etc. ;  and  division 
of  the  common  stock  into  classes,  each  class  electing  a  due 
proportion  of  the  directors,  etc.  (See  Chapter  VIII, 
"Stock.") 

The  division  into  common  and  preferred  stock  and  the 
indicated  division  of  preferred  stock  may  be  secured  by  char- 
ter provision  in  nearly  every  state  in  the  Union,  together  with 
such  other  proper  classifications  of  the  preferred  stock  as  may 
be  desired. 

The  division  of  the  common  stock  into  voting  classes,  and 
the  many  other  classifications  occasionally  employed,  may  usu- 
ally be  secured  by  special  charter  provision  where  such  pro- 
visions are  allowed.     (See  §  140.) 

Where  permitted  by  the  statutes,  the  classification  of  stock 
may  be,  and  occasionally  is,  carried  into  wide  variations. 
Sometimes  a  portion  of  the  stock  will  be  denied  the  voting 
right  entirely,  or  will  be  prohibited  from  voting  on  particu- 
lar questions.  Certain  stock  may  be  debarred  from  partici- 
pation in  dividends  for  a  stated  period.  In  New  York  a 
peculiar  partly  paid  stock  may  constitute  a  part  of  the  issue, 
drawing  dividends  only  upon  the  amount  actually  paid  in 
upon  it. 

These  unusual  arrangements  are  desirable  only  under  ex- 
ceptional circumstances.     Generally  they  are  to  be  avoided  as 


SPECIAL   PROVISIONS  1 77 

being  complicated,  unnecessary,  and  at  times  of  uncertain  re- 
sult. 


§  157.    Corporate  Stockholding 

At  common  law  a  corporation  cannot  hold  stock  in 
another  corporation.  Though  the  law  was  not  formulated 
with  any  such  intent,  its  practical  effect  was  to  render  the 
formation  of  trusts  and  combinations  extremely  difficult,  and 
in  many  cases  impossible. 

New  Jersey  was  the  first  state  to  modify  the  law  in  this 
direction  and  to  grant  to  corporations  unlimited  power  to 
hold  and  vote  stock  in  other  corporations,  but  in  19 13,  in  an 
attempt  to  check  monopoly  and  to  do  away  with  holding  com- 
panies, the  New  Jersey  legislature  passed  a  drastic  act  taking 
away  this  power.^  In  191 5,  however,  an  act  was  passed 
which  restored  the  power  so  far  as  to  allow  a  corporation  to 
purchase  stocks  and  bonds  of  other  corporations  for  invest- 
ment, but  not  to  use  the  same  in  voting  or  otherwise  to 
restrain  trade  or  to  bring  about  any  lessening  of  competition.* 
Delaware  and  other  states  followed  the  earlier  statutes  of 
New  Jersey,  and  in  a  number  of  these  states,  under  existing 
statutes,  corporations  have  the  unlimited  power  first  granted 
in  New  Jersey.  Other  states  have  granted  the  power  within 
certain  limits.  New  York  has  followed  New  Jersey  to  the 
extent  of  allowing  this  right  where  provision  is  made  there- 
for in  the  charter,  or  where  the  corporation  whose  stock 
is  purchased  is  of  a  similar  nature,  and  one  with  which  the 
purchasing  corporation  would  be  authorized  to  consolidate. 

The  right  is,  at  times,  a  very  valuable  one  and,  in  those 
states  where  allowed,  a  provision  authorizing  the  holding  of 
corporate  securities  by  the  corporation  is  usually  included 
in  the  charter.     (See  Chapter  LIII,  ''Holding  Corporations.") 


'  N.  T.  Laws  of  1913,  Ch.  18,  p.  32. 
*N.  J.  Laws  of  1915,  Ch.  114,  p.  180. 


178  THE   CHARTER 

§  158.     Limitations  on  Indebtedness 

In  a  large  proportion  of  the  cases  where  corporations 
are  wrecked,  the  result  is  brought  about  by  the  directors' 
abuse  of  the  power  to  incur  debt.  In  those  states  where  the 
power  of  the  directors  in  this  respect  may  be  limited  by  char- 
ter provision,  such  restriction  is,  on  occasion,  very  desirable. 
Limitations  on  indebtedness  vary  with  the  conditions.  Under 
some  circumstances  it  may  be  desirable  to  fix  an  absolute  limit 
beyond  which  the  directors  have  no  power  to  obligate  the  cor- 
poration. Or  it  may  be  provided  that  if  the  directors  exceed 
a  certain  sum,  they  shall  be  held  personally  liable  for  such 
excess;  or  that  they  shall  not  enter  into  any  single  contract 
involving  obligations  over  a  certain  amount;  or  that  obliga- 
tions beyond  a  certain  amount  shall  be  incurred  only  with  the 
affirmative  vote  of  two  thirds  or  other  proportion  of  the 
whole  board,  or  shall  be  undertaken  only  after  authorization 
thereto  by  due  resolution  of  the  stockholders. 

Whatever  the  plan  adopted  it  should  be  carefully  con- 
sidered and  adapted  to  the  special  situation,  and  the  limi- 
tations should  not  be  so  low  as  to  amount,  nor  so  narrow  in 
application,  as  to  interfere  with  the  ordinary  operations  of  the 
business.  The  abuse,  not  the  use,  of  the  debt-incurring  power 
is  to  be  prevented.     (See  §§  149,  225.) 

It  is  also  to  be  noted  that  conditions  may  arise  under 
which  the  directors  are  powerless  to  prevent  corporate  indebt- 
edness in  excess  of  charter  or  by-law  limitations.  Thus,  the 
corporate  revenues  may  be  unexpectedly  curtailed  but  never- 
theless, with  a  fine  disregard  of  prohibitory  provisions,  taxes, 
rents,  official  salaries,  and  other  contract  obligations  continue 
to  roll  up  a  constantly  increasing  load  of  corporate  debt.  In 
such  cases  the  directors  cannot  be  held  accountable,  though 
the  limitation  has  been  exceeded.^ 


'i  In  re  Putnam,  193  Fed.  464  (i9iii). 


SPECIAL   PROVISIONS  179 

§  159.     Limitations  on  Salaries 

The  diversion  of  profits  by  excessive  salaries  is  a  not 
uncommon  method  of  draining  a  corporate  treasury  and 
thereby  preventing  the  payment  of  proper  dividends.  If  not 
properly  guarded  against  at  the  time  of  the  organization  of 
the  corporation,  such  practice  may  be  extremely  difficult  to 
correct  or  prevent  later.^ 

Charter  provisions  imposing  limitations  on  salaries  should 
not  be  made  too  narrow  or  too  inflexible.  Good  management 
is  an  absolutely  indispensable  element  of  success,  and  fair 
salaries,  with  even  more  liberal  compensation  when  demanded 
by  the  welfare  of  the  company  or  justified  by  the  excellence 
of  the  management,  should  not  be  rendered  impossible  by  too 
narrow  restrictions. 

Flexibility  of  restriction  in  the  matter  of  salaries  may  be 
provided  for  in  various  ways.  The  charter  provision  may 
merely  require  that  salaries  be  fixed,  and  varied  thereafter  if 
need  be,  by  a  two-thirds  vote  of  the  entire  board.  Occa- 
sionally the  concurrence  of  the  entire  board  may  be  required. 
Or  the  salaries  of  officers  may  be  determined  each  year  at  the 
stockholders'  annual  meeting  by  a  stated  majority  of  the  en- 
tire outstanding  stock.  In  such  case  the  required  majority 
may  be  fixed  so  high  as  to  require  the  concurrence  of  any 
desired  part  of  the  minority  interests.  Or  it  may  be  provided 
that  no  official  salary  shall  be  increased  over  a  stated  figure, 
until  a  dividend  of,  say,  6  per  cent  has  been  paid  upon  the  out- 
standing stock  for  two  or  more  years.  Or  any  salary  pay- 
ments over  a  certain  minimum  might  be  made  absolutely  de- 
pendent each  year  upon  the  payment  of  a  certain  dividend  for 
the  previous  year. 

It  is  to  be  noted  that  where  the  ease  of  alteration  is  not 
objectionable,  provisions  limiting  indebtedness  and  salaries  are 


•Raynolds  v.  Diamond  Mills  Paper  Co..  69  N.  J.  Eq.  299  (190s);  Jacobson  v. 
Brooklyn  Lumber  Co.,  184  N.  Y.  152  (1906) ;  Davids  v.  Davids,  135  A.  D.  (N.  Y.)  ao6 
(1909);  Carr  v.  Kimball,  153  App.  Div.  (N,  Y.)  825  (1912)- 


l8o  THE   CHARTER 

usually  included  in  the  by-laws  instead  of  the  charter.  Here 
they  may  be  modified  as  the  circumstances  demand,  whereas 
in  the  charter  they  may  be  altered  only  by  formal  amend- 
ment of  that  instrument.  But  to  protect  the  minority  effectu- 
ally, such  limitations  must  under  ordinary  circumstances  be 
inserted  in  the  charter.     (See  §§  149,  225.) 

§  160.     Sundry  Provisions 

Many  other  provisions  will  on  occasion  be  incorporated 
in  the  charter.  This  is  especially  so  in  the  incorporation  of  a 
partnership  or  the  reorganization  or  consolidation  of  corpo- 
rations, when  special  provisions  are  often  necessary  to  insure 
the  varying  interests,  or  to  carry  out  agreements  entered  into 
as  a  prerequisite  to  the  proposed  arrangement. 

It  is  essential  that  such  provisions  shall  not  go  counter 
to  any  law  regulating  corporations,  and  important  that  they 
be  not  such  as  to  involve  the  corporation  in  any  subsequent 
deadlock  or  entanglement.  The  death  of  parties,  sale  of  stock 
to  strangers,  change  of  industrial  conditions  and  other  muta- 
tions may  make  apparently  desirable  arrangements  exactly  the 
reverse.  It  is  not  always  possible  to  amend  a  charter,  and, 
if  there  is  any  doubt  as  to  the  expediency  or  effect  of  any 
particular  provision,  it  should  be  brought  into  the  by-laws 
rather  than  the  charter.  Then  if  found  undesirable,  it  may 
usually  be  amended  or  altered  by  a  mere  majority  vote  of 
the  stockholders. 


CHAPTER   XXIII 
EXECUTION  AND  FILING  OF  CHARTER 

§  i6i.     General 

In  each  state  the  essential  features  of  the  charter  are  pre- 
scribed by  its  corporation  laws.  In  many  states  a  form  of 
charter  application  is  prepared  by  the  state  authorities  and 
will  be  furnished  by  them  on  application.  Where  this  is  not 
done  the  forms  are  usually  prepared  by  law  stationers  and 
kept  on  sale.  Care  should  be  exercised  in  the  use  of  these 
prepared  forms,  as  they  sometimes  contain  undesirable  fea- 
tures which  must  be  eliminated  before  the  form  is  used.  In 
some  states  most  of  the  published  forms — and  notably  those 
for  New  Jersey  and  Delaware — include  the  objectionable  pro- 
visions of  the  trust  charters  whereby  the  minimum  of  power 
is  left  with  the  stockholders  and  the  rights  of  the  minority 
are  reduced  to  their  lowest  terms.  Such  features,  while  pos- 
sibly adapted  to  trust  management,  are  not  usually  desirable 
for  an  ordinary  corporation. 

If  any  of  these  prepared  forms  have  received  the  sanction 
or  approval  of  the  state  authorities,  such  forms  should  either 
be  used  or  be  closely  followed.  To  depart  materially  there- 
from is  to  invite  objection,  which  may  at  times  be  captious 
and  in  any  case  will  cause  delay  and  trouble.  The  authorities 
cannot  be  deemed  unreasonable  in  their  preference  for  forms 
which  have  been  passed  upon,  with  which  they  are  familiar, 
and  which,  when  used,  enable  them  the  more  readily  to  deter- 
mine the  legality  and  correctness  of  an  application. 

In  addition  to  the  usual  provisions  of  the  charter,  any 
special  provisions  desirable  for  the  particular  corporation  and 

i8i 


l82  THE   CHARTER 

permissible  under  the  laws  of  its  state  will  be  included  and 
the  charter  application  is  then  ready  for  the  final  formalities. 
These  consist  of  its  signing,  acknowledgment,  and  filing. 

These  final  formalities  are  in  a  general  way  similar  in 
almost  all  the  states,  but,  as  the  matter  is  one  of  statutory 
regulation,  the  laws  of  the  particular  state  must  be  consulted 
for  the  details  of  procedure. 

§  162.     Signing  and  Acknowledgment 

Each  of  the  incorporators  must  sign  and  acknowledge 
the  charter  application.  If  there  are  but  three  incorporators 
and  they  come  together  for  the  signing  and  acknowledgment 
of  the  instrument,  the  formality  is  a  simple  one.  The  three 
acknowledgments  are  taken  at  the  one  time  and  one  notarial 
certificate  serves  for  all.  If  the  notarial  officer  who  acts  in 
the  matter  calls  on  the  incorporators  at  their  offices  or  resi- 
dences and  takes  their  several  acknowledgments,  the  one  nota- 
rial certificate  will  still  serve.  If,  however,  the  incorporators 
are  numerous,  live  in  other  states,  or  for  any  other  reason 
cannot  be  easily  reached  or  assembled,  separate  notarial  cer- 
tificates may  be  necessary  for  each  acknowledgment.  A  party 
to  the  charter  cannot  act  as  notary  therein.^ 

These  acknowledgments  may  usually  be  taken  by  a  notary 
public,  commissioner  of  deeds,  justice  of  the  peace,  or  other 
officer  authorized  to  take  acknowledgments  to  deeds.  If  taken 
in  another  state,  a  certificate  may  be  necessary  as  to  the  due 
appointment  and  authority  of  the  officer  by  whom  the  acknowl- 
edgment is  taken.  The  statutes  are  in  most  cases  explicit  as 
to  the  details  of  acknowledgment,  and,  as  the  whole  matter  is 
one  of  statutory  regulation,  these  must  be  closely  followed. 

In  some  states,  in  addition  to  the  usual  execution  by  the 
incorporators  it  is  necessary  to  secure  the  approval  of  the  pro- 


People,  etc.  v.   Commissioners,  105  App.  Div.  (N.  Y.)  273  (1905). 


EXECUTION    AND    FILING  183 

posed  incorporation  by  some  designated  court,  or  by  a  judge 
of  such  court,  as  one  of  the  preliminaries  to  filing. 

§  163.     Filing 

The  technical  details  of  filing  the  charter  application  vary 
to  some  extent  in  the  different  states.  In  some  the  application 
is  sent  directly  to  the  Secretary  of  State,  accompanied  by  the 
prescribed  fees.  In  others,  the  application  must  be  sent  direct 
to  the  Secretary  of  State  but  the  filing  fees  are  paid  the  State 
Treasurer,  who  before  the  charter  will  be  filed  must  certify 
to  the  Secretary  that  this  has  been  done.  Again  in  some  states 
the  charter  must  be  filed  with  the  clerk  of  the  county  court 
in  the  home  county  of  the  corporation,  before  filing  with  the 
Secretary  of  State;  elsewhere  the  charter  must  be  filed  with 
the  clerk  of  the  county  court  after  its  filing  with  the  State 
Secretary. 

The  treatment  accorded  the  charter  applications  by  the 
filing  officials  also  varies  in  the  different  states.  In  some,  these 
officials  consider  that  the  insertion  of  unauthorized  or  im- 
proper powers  gives  no  legal  authority,  and  that  they  are  not 
called  upon  to  decide  the  legal  effect  of  the  verbiage  employed, 
and,  in  accordance  with  these  views,  accept  any  powers  or 
purposes  not  openly  in  conflict,  or  glaringly  outside  the  intent 
of  the  law.  In  other  states,  on  the  contrary,  the  authorities 
scrutinize  the  application  in  detail,  and,  if  its  purposes  and 
powers  seem  to  exceed  the  statutory  limits,  decline  to  file  the 
application.  In  such  case  the  application  is  returned  with  an 
explanation  or  statement  of  the  reasons  for  its  refusal. 

At  times  the  state  authorities  clearly  exceed  their  author- 
ity in  passing  upon  the  legality  of  the  indicated  powers  of  a 
charter  application.  In  such  case  if  the  matter  were  of  suffi- 
cient importance  and  the  delay  not  too  serious,  the  courts 
might  be  invoked  and  the  points  in  question  be  decided  by  com- 
petent authority.     Generally,  however,  the  importance  of  the 


i84 


THE  CHARTER 


matter  will  not  justify  such  proceedings,  and,  if  the  official 
ruling  cannot  be  changed,  the  purposes  or  other  matters  in 
question  must  be  either  omitted  or  so  changed  as  to  meet  the 
views  of  the  authorities. 

If  any  required  alteration  in  an  executed  charter  is  on 
some  non-essential  point,  and  all  the  incorporators  agree 
thereto,  it  is  not  usually  necessary  to  redraft  and  re-execute 
the  entire  instrument.  The  change  may  be  made  in  the  orig- 
inal instrument  either  as  an  interpolation  or  as  a  correction, 
and  the  document  be  then  returned  for  acceptance  in  its 
amended  form. 

When  a  required  alteration  is  material,  the  better  prac- 
tice is  to  have  the  instrument  redrawn  and  executed  afresh  by 
the  incorporators.  If,  however,  a  material  alteration  were 
made  in  the  instrument  without  any  re-execution,  but  with 
the  consent  or  subsequent  acceptance  of  the  incorporators, 
and  the  charter  so  altered  were  duly  allowed  and  filed  by  the 
state  officials,  it  is  not  probable  that  it  could  later  be  success- 
fully attacked. 

In  some  states,  when  an  application  is  approved,  a  charter 
pro  forma  is  issued  under  the  Seal  of  State  granting  to  the 
corporation  the  desired  rights,  powers,  and  privileges.  In 
other  states  the  charter  application  itself  changes  its  nature, 
and  as  soon  as  filed  becomes  the  charter  of  the  then  author- 
ized corporation.  Its  form  is  not  changed,  but  its  force  is 
and  it  is  then  an  authorization  from  the  state  for  the  organ- 
ization of  the  corporation  with  all  the  powers,  privileges,  and 
characteristic  features  detailed  in  the  one-time  application. 

§  164.     Certified  Copies 

In  some  states,  as  already  said,  when  a  charter  applica- 
tion is  approved,  the  Secretary  of  State  issues  a  duly  certified 
charter  under  the  Great  Seal  of  State  as  part  of  the  regular 
routine.     In  others,  the  Secretary  merely  notifies  the  party 


EXECUTION   AND    FILING 


185 


filing  the  application  that  it  has  been  accepted  and  filed,  this 
accepted  application  then  becoming  the  charter  of  the  corpora- 
tion. In  this  latter  case  the  Secretary  will  at  any  time  upon 
payment  of  the  legal  fees  furnish  certified  copies  of  the  ac- 
cepted application — now  the  charter — which  is  always  due 
legal  evidence  of  incorporation. 

Where  certified  copies  of  the  charter  are  to  be  recorded 
with  the  local  authorities,  they  must,  of  course,  be  secured 
from  the  state  authorities  as  part  of  the  organization  routine. 
Beyond  this,  the  possession  of  a  certified  copy  of  the  charter 
is  of  no  importance,  save  very  rarely  in  cases  of  litigation,  and, 
on  occasion,  for  its  effect  on  interested  parties — or  parties  to 
be  interested.  It  is  usual,  however,  to  secure  and  preserve 
a  certified  copy  among  the  archives  of  the  corporation. 


CHAPTER   XXIV 

AMENDMENT  OF  CHARTER 

§  165.     General 

The  connection  between  corporate  organization  and  char- 
ter amendments  is  not  at  first  sight  obvious.  Charter  amend- 
ments are,  however,  too  often  the  result  of  hasty  or  careless 
preparation  of  the  original  instrument.  Also  changed  or  un- 
foreseen conditions  not  infrequently  render  charter  amend- 
ments desirable  before  the  corporate  organization  has  been 
completed.  A  brief  consideration  of  the  subject  is  therefore 
in  place. 

New  Jersey,  with  its  usual  accommodating  recognition 
of  possible  corporate  needs,  permits  the  amendment  of  a  char- 
ter by  a  very  simple  process  at  any  time  before  the  corporate 
organization  is  completed.  In  this  way  new  conditions  may 
be  provided  for  and  the  cruder  defects  of  a  hastily  prepared 
charter  may  be  easily  remedied.  Thereafter,  as  in  other  states, 
the  charter  may  be  amended  only  by  the  regular  procedure 
provided  for  such  cases.     Delaware  has  a  like  provision. 

In  New  York  if  there  are  informalities  in  the  original 
charter,  or  defects  in  its  proof  or  acknowledgment,  or  if  the 
charter  contains  any  matter  not  authorized  by  law,  the  statute 
provides  a  simple  method  of  correcting  these  defects  by  per- 
mitting the  incorporators  or  directors  to  file  an  amended 
charter.^ 

§  166.     Subject  Matter 

Any  provisions  may  be  brought  into  a  charter  amendment 
that  might  have  been  brought  into  the  original  charter.     As 


*  Gen.  Corp.  Law,  §  7. 

186 


AMENDMENT 


187 


soon  as  allowed,  the  provisions  of  such  amendment  become  to 
all  legal  intents  part  of  the  original  charter  and  as  permanently 
binding  on  the  corporation. 

When  an  amendment  has  been  made,  such  amendment 
and  the  original  charter  taken  together  constitute  the  work- 
ing charter  of  the  corporation ;  the  amendment,  however,  tak- 
ing precedence  over  and  modifying  the  original  charter  in  all 
points  of  difference. 

§  167.     Procedure 

The  procedure  for  the  amendment  of  a  charter  is,  in  each 
state,  prescribed  by  law.  There  is  but  little  uniformity  in  the 
different  states,  though  in  all  the  procedure  is  troublesome  and 
at  times  expensive.  In  many  states  the  statutory  procedure 
varies  with  the  nature  of  the  amendment.  Thus  in  New  York, 
to  change  the  name  of  a  corporation  application  must  be  made 
to  designated  courts,  while  to  change  the  number  of  directors 
application  must  be  made  to  the  state  officials. 

Generally,  an  amendment  of  the  charter  requires  a  duly 
called  meeting  of  the  stockholders,  at  which  a  two-thirds  ma- 
jority of  the  stock  interests  outstanding  must  vote  in  favor 
of  the  proposed  changes.  The  amendment,  duly  acknowledged 
as  evidence  of  the  stockholders'  authorization,  must  usually 
be  filed  in  the  same  offices  and  with  the  same  formalities  as 
the  original  charter. 

In  some  states  advertisement  must  be  made  for  a  pre- 
scribed time  before  any  charter  amendment  goes  into  effect. 
The  proportion  of  the  stock  vote  required,  the  notices  to  be 
given,  and  the  other  formalities  also  vary  in  the  different 
states.  In  Delaware  a  bare  majority  have  power  to  amend  the 
charter. 


Part  VI— The  By-Laws 


CHAPTER   XXV 

GENERAL  CONSIDERATIONS 

§  1 68.     Functions  of  By-Laws 

A  modern  corporation  is  regulated,  first,  by  the  general 
laws  under  which  it  operates;  second,  by  the  provisions  of  its 
charter;  and  third,  by  its  by-laws.  When  the  incorporators 
meet  pursuant  to  the  authorization  of  their  charter  for  organ- 
ization, both  the  general  laws  and  the  charter  exist  for  the 
guidance  of  the  new  corporation.  To  these  must  be  added  the 
by-laws  to  provide  for  such  details  of  organization,  adminis- 
tration, and  business  routine  as  are  not  prescribed  by  the  laws 
nor  provided  for  in  the  charter.  This  is  the  first  and  most 
important  function  of  the  by-laws. 

Beyond  this,  any  special  provisions  for  the  regulation  of 
the  corporation,  its  directors,  officers,  or  membership  may 
be  incorporated  in  the  by-laws  when  such  provisions  are  not 
permitted  in  the  charter  or  when  the  permanence  of  a  charter 
provision  is  not  desired. 

In  addition,  the  by-laws  are  also  usually  so  drawn  as  to 
constitute  a  systematic  statement  of  the  more  important  work- 
ing details  of  both  the  general  law  and  the  charter.  This 
is  not  done  with  any  idea  of  adding  to  the  binding  force  of  the 
requirements  of  these  higher  authorities,  but  merely  as  a 
restatement,  the  by-laws  being  thereby  rendered  a  more  com- 
plete code  for  the  guidance  of  the  corporate  officials  and  stock- 
holders. 

i88 


GENERAL  CONSIDERATIONS 


189 


This  use  of  the  by-laws  is  customary  and  of  considerable 
importance,  helping  to  secure  the  observance  of  those  statutory 
and  charter  provisions  which,  if  not  in  such  accessible  form, 
might  be  overlooked  or  forgotten. 

§  169.     Subject  Matter 

There  is  usually  no  law,  save  the  law  of  necessity,  com- 
pelling a  new  corporation  to  adopt  by-laws.  Its  operation 
without  by-laws  would,  however,  be  practically  impossible — 
so  much  so  that  the  law  confers  the  power  to  make  by-laws 
and  takes  it  for  granted  that  this  right  will  be  exercised.  Pro- 
visions for  the  regulation  of  the  corporation  are  found  both  in 
the  statute  law  and  the  charter,  but  these  are  for  the  most  part 
general  in  their  nature.  There  are  none  of  the  specific  details 
essential  for  proper  corporate  operation. 

Just  what  matters  should  be  provided  for  in  the  charter 
and  what  in  the  by-laws  is,  to  some  extent,  determined  by  the 
conditions  of  the  particular  corporation.  The  statutes  usually 
prescribe  certain  essential  matters  that  must  appear  in  the 
charter.  In  addition,  all  such  important  matters,  outside  the 
ordinary  routine  of  corporate  procedure,  as  are  intended  to  be 
permanent  features  of  the  organization  should  be  incorporated 
in  the  charter.  (See  Chapter  XXII,  "Special  Provisions.") 
The  routine  details  of  corporate  procedure,  and  any  special 
provisions  which  are  not  intended  to  be  permanent  or  which 
are  not  permissible  in  the  charter,  are  reserved  for  the  by-laws. 
Generally  speaking,  nothing  should  be  incorporated  in  the 
charter  that  may  be  as  effectually  provided  for  in  the  by-laws. 

The  by-laws,  as  has  been  stated,  also  usually  contain  many 
provisions  of  the  statute  law  and  the  charter  which  are  re- 
peated in  the  proper  connection  in  the  by-laws  merely  that 
these  latter  may,  in  themselves,  be  a  complete  working  code. 
The  by-laws  will,  then,  contain  all  the  ordinary  working  details 
of   corporate   regulation  and  most — if  not  all— of  the  im- 


ipo 


THE  BY-LAWS 


portant  statutory  and  charter  provisions  directly  affecting  the 
corporation,  frequent  reference  to  the  charter  and  to  the  stat- 
utes being  thereby  rendered  unnecessary. 

Under  the  head  of  routine  details,  the  by-laws  should, 
in  strict  conformity  with  any  requirements  of  statutes  or 
charter,  provide  for  the  issuance  and  transfer  of  stock,  the 
meetings  of  stockholders  and  directors,  the  election  of  direc- 
tors and  officers,  the  duties  and  limitations  imposed  upon 
these,  the  care  and  management  of  the  property  and  finances 
of  the  corporation,  and  the  other  connected  incidents  of  cor- 
porate procedure. 

There  are  certain  general  restrictions  upon  the  making  of 
by-laws  which  the  courts  will  enforce.  By-laws  must  not  be 
inconsistent  with  the  existing  laws  or  with  the  charter  of  the 
corporation  ;^  they  must  not  operate  unequally  upon  any  of  the 
class  which  they  are  intended  to  govern  f  they  must  not  impair 
any  vested  right  of  any  stockholder,^  and  they  must  not  be 
unreasonable.* 

§  170.     Power  to  Make 

The  power  to  make  by-laws  is  one  of  the  common-law 
powers  enjoyed  by  corporations.  Where  the  common  law 
still  prevails,  the  right  to  make  by-laws  resides  in  the  stock- 
holders duly  assembled  in  lawful  meeting.  Power  to  make 
by-laws  may  be  delegated  by  the  stockholders  to  the  directors, 
but  may  be  resumed  at  any  time  by  the  stockholders,  and  may 
be  exercised  by  the  directors  only  under  such  limitations  as 
the  stockholders  prescribe.  This  power  over  the  by-laws  is 
perhaps  the  most  important  right  reserved  to  the  stockholders. 

This  is  so  because,  as  already  stated,   the  stockholders 


»  Raub  V.  Gerken,  127,  App.  Div.  (N.  Y.)  42  (1908) ;  People  v.  Ittner,  165,  III.  App. 
360  (igi'i). 

»  Griffith  V.  Klamath  Water  Users'  Assn.,  137  Pac.  (Ore.)  226  (1913) ;  10  Cyc.  ss6 
and  cases  cited. 

» State  V.  Board,  etc.,  164  S.  W.  (Tenn.)  1151,  (1914));  Wright  v.  Knights  of  the 
Maccabees,  196  N,  Y.  391  (1909). 

*  State  V.  Mayor,  etc.,  of  Jersey  City,  37  N.  J.  L.  348  (1875) • 


GENERAL  CONSIDERATIONS  19I 

cannot  manage  the  affairs  of  their  corporation  directly  but 
only  through  the  board  of  directors.  This  board  is  not  amen- 
able to  either  request  or  resolution  of  the  stockholders  and  has 
wide  latitude  and  great  independent  power  in  the  management 
of  the  corporate  affairs  and  property.  If  any  restrictions  are 
to  be  imposed  upon  the  directors'  powers,  recourse  must  be 
had  to  special  charter  or  by-law  provisions.  Special  charter 
provisions  are  of  limited  application  and  not  always  available, 
and  in  most  cases  the  wishes  of  the  stockholders  as  to  the 
management  of  their  property  and  business  must  be  expressed 
in  the  by-laws,  and  can  be  effectively  expressed  in  no  other 
way.  For  this  reason  anything  affecting  the  stockholders' 
sole  right  to  make,  repeal,  and  amend  these  by-laws  is  a  matter 
of  vital  importance. 

In  New  Jersey  and  those  other  states  which  have  modeled 
after  her  corporation  laws,  the  charter  may  be  so  worded  as 
to  give  the  directors  power  to  make  and  amend  by-laws.  This 
gives  the  directors  the  power  to  alter  the  regulations  by  which 
they  themselves  are  controlled.  The  expediency  of  such  an 
arrangement  is  exceedingly  doubtful,  even  in  the  large  indus- 
trial combinations  for  whose  benefit  it  was  devised.  Its  ten- 
dency is  to  put  much  power  into  the  hands  of  the  directors 
and  of  the  majority  stockholders  by  whom  such  directors  are 
elected,  and  to  diminish  correspondingly  the  status  and  power 
of  the  minority  stockholders. 

In  New  York  the  directors  are,  by  statute  provision,  given 
the  power  to  adopt  by-laws  not  inconsistent  zvith  those  passed 
by  the  stockholders.  This  would  seem  to  be  quite  as  far  as 
it  is  safe  to  go.  It  allows  the  directors  to  pass  by-laws  to  meet 
an  emergency,  to  provide  for  new  conditions,  or  to  supplement 
and  make  more  effective  the  stockholders'  by-laws,  and  they 
are  fully  within  their  powers  so  long  as  these  by-laws  do  not 
conflict  with  the  by-laws  adopted  by  the  stockholders.  The 
directors  cannot,  however,   remove  any  of  the   safeguards 


I^  THE   BY-LAWS 

thrown  round  the  conduct  of  the  business  by  the  by-laws  ot 
the  stockholders,  nor  modify  the  stockholders'  by-laws  in  any 
material  respect.  They  may  act  in  harmony  with  what  has 
gone  before,  but  cannot  alter  or  destroy.  It  is  to  be  noted  that 
such  directors'  by-laws,  until  repealed  or  superseded  by  action 
of  the  stockholders,  are  the  by-laws  of  the  company  and  of 
equal  force  with  those  adopted  by  the  stockholders.  If  the 
original  by-laws  are  adopted  by  the  directors,  these  by-laws 
are  the  law  of  the  corporation,  and  can  be  amended  by  the 
directors,  subject,  however,  to  amendment  or  repeal  at  the 
hands  of  the  stockholders.     (See  §  150.) 

In  Illinois,  by  a  rather  strange  perversion  of  the  corporate 
theory  of  government  the  directors,  by  statute,  have  power  to 
make  by-laws  and  the  stockholders  have  power  neither  to 
make  nor  amend  the  by-laws.^ 

§  171.    Arrangement 

By-laws  intended  for  a  close  corporation  with  but  few 
stockholders  and  perhaps  all  these  on  the  board  of  directors, 
may  be  simple  in  form  and  few  in  number.  When  intended 
for  one  of  the  great  corporate  combinations  with  plants  in 
many  different  states,  with  thousands  of  stockholders  scattered 
throughout  the  Union,  with  a  large  directorate,  many  officers, 
and  numerous  managing  committees,  an  extensive  and  com- 
prehensive set  of  by-laws  is  usually  considered  essential. 

In  either  of  these  cases,  and  for  the  many  intermediate 
corporations,  it  is  of  much  advantage  to  have  the  by-laws 
classified  and  systematized  so  that  the  regulations  governing 
any  particular  subject  or  matter  may  be  readily  found.  In 
all  the  better  prepared  sets  of  by-laws  this  systematic  classi- 
fication is  employed.  In  many  cases,  however,  the  by-laws 
are  hardly  more  than  a  heterogeneous  jumble  of  unconnected 


•Steinweg  v.  Antiseptol  Liquid  Soap  Co.,  168  III.  App.  479  (1912). 


GENERAL   CONSIDERATIONS  I93 

regulations,  badly  balanced,  incomplete,  difficult  in  operation, 
and  because  of  this,  the  less  likely  to  be  observed. 

In  the  present  volume  the  related  provisions  of  the  by- 
laws are  grouped  in  the  order  and  under  the  headings  given 
below.  This  arrangement  is  used  by  a  number  of  the  best 
organized  corporations  of  the  country  and  has  proved  very 
satisfactory  in  practice.  By-laws  from  the  simplest  to  the  most 
comprehensive  sets  may  be  readily  classified  on  these  lines: 

I.    Stock 


Stockholders 

Directors 

Standing  Committees 

Officers 

Dividends  and  Finance 

Sundry  Provisions 

Amendments 


§  172.     Preparation 

The  by-laws  usually  prescribe  the  general  organization  of 
the  corporation,  and  the  adoption  of  by-laws  is  therefore  the 
first  important  step  in  organizing  a  corporation.  As  the  by- 
laws are  needed  so  early  in  the  corporate  existence,  they  are 
customarily  prepared  in  advance  of  the  first  meeting,  this  duty 
usually  and  properly  falling  upon  the  counsel  conducting  the 
organization  of  the  corporation. 

The  preparation  of  a  set  of  by-laws  for  the  usual  small 
corporation  is  a  comparatively  simple  matter.  For  the  larger 
corporations,  with  their  more  complex  and  extended  organi- 
zations, the  undertaking  is  much  more  difficult.  Such  by-laws 
should  be  prepared  with  nice  adaptation  to  the  needs  of  the 
particular  corporation.  The  use  of  an  existing  set  of  by-laws 
as  a  basis  for  this  work  is  entirely  proper  and  good  practice, 
but  such  selected  set  should  be  carefully  studied  and  properly 
adapted  to  the  wants  of  the  new  corporation.    All  unnecessary 


194 


THE   BY-LAWS 


matter  should  be  dropped,  the  matter  that  is  retained  be  made 
to  fit  the  case  in  hand,  and  such  new  matter  added  as  may  be 
necessary  to  cover  the  requirements  of  the  particular  corpora- 
tion. 

Too  often  the  preparation  of  the  by-laws  of  a  new  corpo- 
ration is  merely  a  wholesale  seizure  of  some  existing  set  with 
hastily  improvised  interpolations  to  meet  the  most  obvious 
individual  needs  of  the  new  organization.  These  by-laws  may 
have  been  a  very  admirable  code  of  procedure  for  the  original 
corporation,  but  so  diverted  they  can  hardly  fail  to  be  a 
wretched  misfit  and  prove  a  fruitful  source  of  trouble.  By- 
laws so  ill-prepared  give  seeming  grounds  for  the  demand  that 
the  directors  be  given  the  power  to  amend  by-laws  as  the  only 
means  of  avoiding  serious  hindrance  and  injury  to  the  busi- 
ness. 

§173.     Adoption  of  First  By-Laws 

The  preparation  of  by-laws  requires  careful  consideration, 
and  it  is  usually  impossible  to  take  sufficient  time  at  the  first 
meeting  to  prepare  by-laws  or  even  properly  to  discuss  and 
amend  a  previously  prepared  set.  This  being  so,  the  responsi- 
bility for  the  by-laws  rests  almost  entirely  with  the  lawyers 
to  whom  their  preparation  is  entrusted.  If  the  by-laws  are  to 
be  adopted  formally,  this  is  accomplished  by  the  reading  of 
each  section  and  its  adoption  by  vote,  followed  by  the  adop- 
tion of  the  set  as  a  whole  at  the  completion  of  the  sectional 
consideration.  Usually,  however,  the  by-laws  are  presented 
to  the  meeting  in  their  entirety,  and,  without  reading  or  other 
investigation  of  their  details,  are  either  adopted  by  formal 
vote  or  accepted  by  acquiescence.  The  legal  effect  of  such 
adoption  is  the  same  as  under  the  more  formal  procedure. 


CHAPTER   XXVI 

BY-LAW   PROVISIONS   RELATING  TO  STOCK 

§  174.     Preliminary 

Formerly  it  was  customary  to  begin  the  by-laws  of  a  cor- 
poration with  a  section  setting  forth  the  name  of  the  corpora- 
tion and  the  amount  of  its  capital  stock.  There  is  no  objection 
to  this,  but,  inasmuch  as  these  fundamental  corporate  features 
appear  in  and  are  fixed  by  the  charter,  and  there  is  no  danger 
of  their  being  overlooked  or  forgotten,  nothing  is  gained  by 
their  repetition  in  the  by-laws  and  they  are  now  generally 
omitted. 

Also  in  former  days  when  preliminary  subscriptions  to  the 
stock  of  a  corporation  were  usual  and  in  many  cases  payable 
in  instalments,  a  by-law  provision  as  to  the  payment  of  these 
instalments  and  the  procedure  in  case  of  default  was  custom- 
ary and  of  some  importance.  In  the  present  day,  however,  the 
formation  of  a  corporation  with  instalment  subscriptions  is 
comparatively  rare,  and  when  it  does  occur  collection  of  the 
subscriptions  is  usually  provided  for  by  resolution  of  the  direc- 
tors. This  avoids  cumbering  the  by-laws  with  matter  that  is 
of  no  permanent  utility. 

The  subject  of  stock  which  is  considered  first  in  the  fol- 
lowing comment  is  one  of  the  most  important  matters  of  by- 
law regulation.  In  most  of  the  states  general  requirements 
relating  to  the  stock  of  the  corporation,  its  certificates,  its 
transfer  and  record,  are  matters  of  statutory  regulation. 
These  statutes  should  be  summarized  and  classified  in  the  by- 
laws and  such  additional  special  regulations  brought  in  as  will 
cover  the  entire  working  details  of  the  subject.    No  open  ques- 

195 


196 


THE  BY-LAWS 


tion   should  be   left   to   cause   later   differences   of   opinion, 
vexatious  disputes,  and  perhaps  more  serious  difficulties. 

§  175.     Certificates  of  Stock 

Every  owner  of  stock  for  which  the  corporation  has  been 
paid  in  full  is  entitled  to  a  certificate  or  certificates,  showing 
the  number  of  full-paid  shares  of  stock  owned  by  him.  A  sub- 
scriber, w^hen  his  subscription  is  accepted,  becomes  a  stock- 
holder of  the  company  and  entitled  to  vote  and  draw  dividends 
if  any  are  declared,  but  is  not  entitled  to  a  certificate  of  full- 
paid  stock  until  he  has  paid  the  full  subscription  price  of  his 
stock.  If  he  has  paid  in  part  he  is  entitled  to  a  receipt  evidenc- 
ing such  payment,  and  if  the  by-laws  so  provided,  or  if  the 
corporation  makes  a  practice  of  issuing  certificates  for  partly 
paid  stock  with  the  amount  of  payments  indorsed  thereon,  he 
has  a  right  to  demand  such  a  certificate  as  soon  as  his  first  in- 
stalment is  paid.  In  the  absence  of  such  by-law  provision  or 
of  such  a  custom,  it  does  not  appear  that  a  stockholder  has 
any  legal  right  to  a  stock  certificate  until  he  has  paid  in  full 
for  the  stock  represented  thereby.  It  would  be  the  better  prac- 
tice to  issue  no  certificates  of  stock  until  the  stock  represented 
by  such  certificates  is  full-paid. 

The  holder  of  a  certificate  of  stock  has  the  right  to  assign 
the  same  to  others,  or  to  surrender  it  and — if  for  more  than 
one  share — ^have  it  split  up  and  issued  as  he  directs  in  certifi- 
cates of  total  equivalent  value.  An  assignee  of  stock  has  the 
same  right,  and  whenever  a  duly  assigned  certificate  is  sur- 
rendered to  the  company  a  new  certificate  or  certificates  must 
be  issued  to  the  assignee  in  his  own  name  if  so  demanded. 
If  transfers  with  reissues  of  certificates  are  frequent,  it  may  be 
advisable  to  impose  a  small  transfer  fee  for  the  benefit  of  the 
secretary  or  other  issuing  officer.  Such  a  fee,  if  reasonable 
in  amount,  will  be  upheld.^ 


1  Giescn  v.  L.  &  N.  Mortgage  Co.,  loa  Fed.  5841  (1900). 


PROVISIONS   RELATING  TO   STOCK  iq-^ 

By-law  specifications  as  to  the  signature  and  sealing  of 
certificates  are  useful  as  prescribing  in  detail  the  execution  of 
the  certificate  and  the  duties  of  the  different  officers  concerned. 
Such  by-law  regulations  must,  as  a  matter  of  course,  follow 
any  statute  provisions.  In  most  states,  the  statutes  provide 
for  the  signature  of  stock  certificates  by  two  officers  of  the 
corporation.  In  somp  states  the  statutes  designate  the  presi- 
dent as  one  of  these  officers,  leaving  to  the  corporation  the 
designation  of  the  second  officer;  in  other  states  the  designa- 
tion of  both  officers  is  left  to  the  corporation.  No  matter  who 
the  signing  officers  may  be,  the  sealing  and  actual  issuing  of 
the  certificate  is  usually  left  to  the  secretary.     (See  §  60.) 

§  176.     Transfers  of  Stock 

General  regulations  regarding  the  transfer  of  stock  as 
well  as  the  times  of  closing  the  stock  books,  are  in  many  states 
a  matter  of  statutory  provision,  but  may  also  properly  appear 
in  the  by-laws  with  any  other  connected  matter.  The  pro- 
cedure for  the  transfer  of  stock  should  be  plainly  outlined  in 
the  by-laws  as  a  guide  to  the  officers  of  the  corporation,  and, 
more  particularly,  for  the  benefit  of  the  stockholders  who  are 
thereby  informed  as  to  their  exact  rights  in  the  matter.  (See 
Chapter  XXXVI,  "Transfer  of  Stock.") 

§  177.     Transfer  Agent  and  Registrar 

In  the  larger  corporations,  or  in  any  corporation  where 
the  transfers  of  stock  are  numerous,  the  employment  of  special 
transfer  agents  and  registrars  is  usually  a  considerable  advan- 
tage. By  this  means  the  officers  are  relieved  of  much  respon- 
sibility, and  a  safety  and  a  convenience  in  the  issuance  of  stock 
secured  not  usually  possible  under  any  other  arrangement. 
For  a  small  or  close  corporation  where  transfers  are  few,  the 
employment  of  such  agents  is  a  needless  expense. 

Where  transfer  agents  and  registrars  are  to  be  employed. 


198 


THE   BY-LAWS 


the  by-laws  should  give  the  power  to  appoint  these  to  either  the 
board  of  directors  or  to  one  of  the  standing  committees.  The 
by-law  provision  covering  this  matter  should  also  require  the 
signature  of  the  transfer  agent  and  of  the  registrar  to  every 
certificate  issued.  Where  a  trust  company  is  to  be  appointed 
as  transfer  agent  or  registrar  and  the  appointment  is  of  prob- 
able permanence,  such  appointee  is  sometimes  named  in  the 
same  by-law  provision.  As  this  necessitates  an  amendment  of 
the  by-laws  in  case  of  any  change,  the  arrangement  is  of  doubt- 
ful expediency. 

The  duties  of  a  transfer  agent  and  of  a  registrar  are  dis- 
tinct but  are  usually  performed  by  one  person  or  institution. 

§  178.     Stock  and  Transfer  Books 

All  requirements  as  to  the  stock  and  transfer  books  should 
appear  in  the  by-laws.  To  this  end  the  statute  laws  must  be 
carefully  consulted  as  to  what  books  must  be  kept,  where  they 
must  be  kept,  and  what  they  must  contain.  New  Jersey  cor- 
porations are  required  to  keep  their  stock  and  transfer  books 
in  the  principal  office  of  the  corporation  in  New  Jersey.  If 
it  is  desirable  that  duplicates  be  kept  elsewhere  the  by-laws 
might  properly  so  provide.  Every  foreign  corporation  doing 
business  in  New  York  is  compelled  to  keep  a  stock  book  in 
the  principal  office  of  the  company  in  the  state.  Hence  the 
by-laws  of  a  corporation  organized  under  the  New  Jersey 
laws  and  doing  business  in  New  York  might  very  well  specify 
in  this  particular  the  duties  of  the  corporation  in  both  states. 

It  is  usual  to  close  the  transfer  books  a  certain  number 
of  days  before  the  annual  meeting,  and  during  this  period 
stock  cannot  be  transferred  on  the  corporate  records.  If  this 
closing  of  the  transfer  books  has  not  already  been  provided  for 
in  the  by-laws  relating  to  the  transfer  of  stock,  it  should  re- 
ceive attention  here.  It  is  also  usual  to  provide  for  the  clos- 
ing of  the  transfer  books  a  certain  number  of  days  before 


PROVISIONS    RELATING   TO    STOCK  jgg 

dividends  are  paid,  and  any  proviso  as  to  this  closing  might 
be  covered  in  connection  with  the  closing  of  the  transfer  books 
for  the  annual  meeting. 

§  179.     Preferred  Stock 

The  preferred  stock  of  a  corporation  will  probably  have 
been  specifically  provided  for  in  the  charter.  It  is  customary, 
however,  to  repeat  such  provisions  in  the  by-laws  for  easy  ref- 
erence and  for  the  information  of  the  stockholders.  As  all  the 
details  relating  to  preferred  stock  are  usually  found  in  the 
charter  provisions  by  which  such  stock  is  created,  the  by-law 
will  be  merely  a  more  or  less  complete  repetition  of  the  charter 
specifications.  In  some  few  states  preferred  stock  is  author- 
ized by  the  provisions  of  the  by-laws,  which  in  such  event  be- 
come of  much  more  moment  and  should  be  drawn  with  the 
same  care  and  regard  for  the  necessities  of  the  case  as  would 
any  charter  provision.  The  by-law  authorizing  the  issue  of 
preferred  stock  cannot  be  materially  altered  or  amended  after 
stock  has  been  sold  under  its  terms,  except  with  the  consent  of 
the  holders  of  the  outstanding  preferred  stock.  If  it  were 
modified  without  such  consent,  the  changes  would  be  ineffec- 
tive as  regards  outstanding  stock  unless  accepted  by  its  hold- 
ers.    (See  Chapter  IX,  "Preferred  Stock.") 

§  180.     Treasury  Stock 

The  term  ''treasury  stock"  is  used  very  loosely,  and,  with- 
out some  defining  provision,  ambiguities  are  apt  to  arise.  For 
this  reason  a  provision  is  frequently  brought  into  the  by-laws 
for  the  purpose  of  defining  the  term  and  the  status  of  treasury 
stock.  Such  a  by-law  is  advisable  if  the  corporation  is  likely 
to  have  stock  of  the  kind. 

The  status  of  this  treasury  stock  is,  where  not  expressly 
fixed  by  statute,  a  matter  of  common  law,  but  should  never- 
theless be  clearly  expressed  in  the  by-laws  as  a  matter  of  in- 


200  THE    BY-LAWS 

formation  for  both  officers  and  stockholders.     (See  Chapter 
XI,  "Treasury  Stock/') 

§  i8i.     Lost  Certificates 

The  loss  of  stock  certificates  is  a  matter  of  not  uncommon 
occurrence,  and  the  procedure  in  such  cases  should  be  clearly 
outlined  in  the  by-laws.  Stockholders  have  a  right  to  certifi- 
cates and,  if  their  certificates  are  lost,  to  have  them  replaced, 
but  the  corporation  on  its  part  has  the  right  to  require  any 
reasonable  safeguards  for  its  own  protection  before  the  reis- 
suance of  such  certificates.  If  the  statutes  prescribe  the  pro- 
cedure to  be  followed,  the  by-law  provisions  must  correspond. 
It  is  seldom  wise  to  reissue  lost  certificates  on  easier  terms 
than  those  laid  down  in  the  by-law  form  given  ( Form  7,  Arti- 
cle I,  §  3,  "Lost  Certificates").  Only  the  absolute  and  final 
loss  of  a  certificate,  as  in  the  case  of  its  unquestioned  destruc- 
tion by  fire,  would  justify  an  unprotected  reissue. 


CHAPTER   XXVII 

BY-LAW     PROVISIONS     RELATING    TO 
STOCKHOLDERS 

§  182.     Annual  Meetings 

An  annual  meeting  of  stockholders  at  which  directors  for 
the  ensuing  year  are  elected  is  usually  required  by  the  statutes. 
Whether  or  not  so  required,  such  meeting  should  be  provided 
for  in  the  by-laws.  It  is  the  most  important  function  of  the 
stockholders,  and  the  portion  of  the  by-laws  devoted  to  the 
stockholders  is  principally  occupied  with  provisions  relating 
to  the  annual  meeting. 

In  specifying  the  time  of  the  annual  meeting  it  is  advisable 
not  to  specify  a  fixed  day  of  the  month,  as,  for  instance 
"January  26"  but  to  fix  the  date  in  some  such  form  as  **the 
third  Monday  in  January."  The  reason  for  this  is  that  if  the 
specified  date  as  first  given  falls  on  a  holiday  or  a  Sunday, 
upon  which  the  meeting  cannot  be  held,  various  questions  may 
arise  as  to  the  validity  of  the  corporation's  proceedings. 

It  is  also  a  good  precaution  to  name  the  time  of  the  day  at 
which  the  meeting  is  to  be  held,  as  precision  in  specifying  the 
time  and  place  may  at  some  time  be  much  needed  in  case  notice 
of  the  annual  meeting  should  be  defective.  If  the  hour  of  the 
meeting  is  not  specified,  it  has  been  held  that  the  by-law  is  not 
sufficient  notice  to  the  stockholders.^ 

In  fixing  the  date  of  the  annual  meeting  it  is  generally 
well  to  fix  it  shortly  after  the  end  of  the  fiscal  year  of  the 
corporation  so  that  the  financial  report  to  the  stockholders  may 
be  comprehensive. 


*  Lowe  V.  Los  Angeles  Suburban  Gas  Co.,  24  Cal.  App.  367  (1914). 


202  THE   BY-LAWS 

For  the  same  reason  the  place  should  be  definitely  fixed, 
and — except  where  it  is  expressly  provided  by  statute,  as  in 
Delaware  and  a  few  other  states,  that  the  stockholders'  meet- 
ings may  be  held  out  of  the  state — the  place  designated  must 
be  in  the  state  of  incorporation. 

The  by-laws  providing  for  the  annual  meeting,  in  addition 
to  fixing  the  time  and  place,  should  in  a  general  way  specify 
the  proceedings  of  that  meeting.  This  specification  of  the 
business  to  be  transacted  at  the  annual  meeting  is  not  manda- 
tory. Any  portion  of  it  can  be  waived  by  the  meeting  at  will. 
Nor  is  it  intended  to  limit  the  stockholders'  proceedings  in  any 
way  unless  expressly  so  stated  in  the  charter  or  by-laws.  It 
is  always  expected  that  in  addition  to  the  specified  procedure, 
any  other  business  or  matters  of  interest  to  the  stockholders 
will  be  considered,  and  the  order  of  business  is  included  in  the 
by-laws  merely  to  prevent  important  action  being  omitted  or 
overlooked  and  as  a  matter  of  convenience. 

§  183.     Special  Meetings 

The  by-laws  must  provide  for  special  meetings  of  the 
stockholders,  and  fix  the  preliminary  requirements  for  such 
meetings.  Frequently  the  president  is  given  authority  to  call 
special  meetings  at  his  discretion;  it  is  always  customary  to 
provide  for  such  meetings  to  be  held  pursuant  to  resolution  or 
other  specified  action  of  the  board ;  at  times  it  is  provided  that 
a  certain  number  of  the  directors  may  call  special  meetings  by 
a  written  request  or  call;  it  is  also  customary  and  proper  to 
allow  these  special  meetings  to  be  called  on  demand  of  a  cer- 
tain proportion  in  interest  of  the  stockholders — usually  one- 
third  or  a  majority  of  the  outstanding  stock. 

It  is  usual  to  prescribe  in  the  by-laws  that  only  such  busi- 
ness as  is  specified  in  the  call  and  notice  shall  be  transacted  at 
a  special  meeting  of  stockholders.  This  is  a  matter  of  com- 
mon law,  and  in  some  states  statutory  law,  and  is  included  in 


PROVISIONS    RELATING   TO    STOCKHOLDERS         203 

the  by-laws  merely  to  emphasize  the  fact  that  any  business  to 
be  done  at  any  such  meeting  must  be  previously  notified  to  the 
stockholders.  The  call  and  notice,  to  be  sufficient,  must  give 
the  three  essential  facts — the  time,  place,  and  purpose  of  the 
meeting.  If  any  one  of  these  is  omitted,  the  meeting  is  im- 
properly called  and  its  action  is  liable  to  be  held  illegal  and 
may  be  set  aside. 

§  184.     Officers  of  Meetings 

It  is  customary  in  some  corporations  to  organize  each 
stockholders'  meeting  with  officers  of  its  own  choosing,  who 
may  or  may  not  be  the  regular  officers  of  the  corporation. 
Under  some  conditions  this  plan  may  be  a  wise  one,  but,  gen- 
erally, it  would  seem  better  to  provide  in  the  by-laws  that  the 
officers  of  the  corporation  shall  also  be  the  officers  of  the  stock- 
holders' meetings.  In  such  case  the  president,  or  in  his  ab- 
sence the  other  officials  in  due  order,  preside,  while  the  secre- 
tary keeps  the  records  of  the  meeting.  Such  an  arrangement 
saves  much  confusion  and  loss  of  time  on  occasion,  and  con- 
duces to  the  orderly  transaction  and  proper  record  of  the  busi- 
ness of  the  meeting. 

The  secretary  is  usually  and  properly  omitted  from  the 
officials  who  may  preside.  The  function  of  this  officer  is  to 
record  the  proceedings  of  the  meeting  and  it  would  not  be  ad- 
vantageous to  withdraw  him  from  his  proper  duties  to  pre- 
side, even  though  all  the  other  officers  were  absent. 

§  185.     Notice  of  Meetings 

Unless  there  is  some  material  reason  for  not  so  doing, 
it  will  be  found  advantageous  to  adopt  the  same  requirements 
as  to  time  and  character  of  notice  for  both  regular  and  special 
meetings.  When  this  is  done  the  requirements  as  to  notice 
may  be  properly  included  in  a  single  by-law  section.  Where 
the  notices  for  the  two  kinds  of  meeting  differ  materially,  the 


204  THE   BY-LAWS 

details  for  each  meeting  should  occupy  a  separate  sub-section 
under  the  sections  providing  for  annual  and  special  meetings. 

The  notice  of  regular  meetings  should  specify  the  time, 
the  place,  and  usually  the  most  important  objects  of  the  meet- 
ing. Where  unusual  business  is  to  be  transacted,  even  at  a  reg- 
ular meeting,  the  notice  of  the  meeting  should  state  that 
unusual  business.^ 

The  notice  for  special  meetings  should  give  the  time  and 
place  of  meeting  and  specify  in  detail  all  the  business  to  be 
acted  upon  at  that  meeting. 

Where  a  corporation  has  but  few  stockholders,  the  pro- 
visions as  to  notice  of  meetings  will  sometimes  include  the 
following  provision  for  special  meetings :  "With  the  presence 
and  participation,  or  with  the  consent  of  all  the  stockholders, 
meetings  may  be  held  at  any  time  and  place  and  for  the  trans- 
action'of  any  business,  without  notice." 

Notice  of  meetings  is  best  given  through  the  regular  postal 
channels;  personal  notice  is  allowable,  but  should  always  be 
served  in  writing.  Verbal  notice,  while  legally  held  sufficient, 
is  objectionable  because  it  is  usually  difficult  and  sometimes 
impossible  of  proof.  By-laws  as  to  notice  of  meetings  should 
include  all  statutory  requirements  of  publication  or  mailing 
of  notices. 

§  1 86.     Voting 

The  usual  rule  in  regard  to  voting  is  that  each  stock- 
holder of  a  corporation  is  entitled  to  one  vote  for  each  share 
of  stock  standing  in  his  name  on  the  books  of  the  corporation. 
If  there  are  any  variations,  such  as  cumulative  voting,  classi- 
fied voting,  or  reservation  of  voting  to  one  class  of  stock,  such 
variation  should  be  stated  as  clearly  as  possible.  Perspicuity 
and  precision  in  the  by-laws  relating  to  voting  may  save  much 


'  2  Cook  on  Corp.,  §  595. 


PROVISIONS    RELATING  TO    STOCKHOLDERS 


205 


trouble  later.     Such  provisions  must,  as  a  matter  of  course, 
conform  to  any  state  statutes  on  the  subject. 

§  187.     Certified  List  of  Stockholders 

Under  the  laws  of  New  Jersey  and  of  some  other  states, 
at  each  regular  meeting  of  the  stockholders  of  a  corporation 
a  certified  list  of  the  stockholders  entitled  to  vote  thereat  must 
be  provided  by  the  secretary.  In  any  state  the  provision  is  a 
satisfactory  one  and  may  well  be  included  in  the  by-laws, 
either  as  a  separate  section,  or  as  a  part  of  the  by-law  pro- 
viding for  annual  meetings  of  the  stockholders.  It  is  to  be 
noted  that  where,  as  is  usually  the  case,  the  statutes  provide 
that  the  stock  books  shall  be  the  final  authority  as  to  the  right 
of  any  stockholder  to  vote,  the  certified  list  of  stockholders 
cannot  be  made  a  substitute  for  the  stock  book,  which  should 
be  accessible  in  case  of  dispute.  The  certified  list  will,  how- 
ever, usually  be  found  all  sufficient,  saving  reference  to  the 
stock  book  and  giving  its  information  in  much  more  conven- 
ient form. 

§  188.     Election  of  Directors 

As  the  election  of  directors  is  the  most  important  busi- 
ness of  the  annual  meeting,  the  by-law  directions  for  its  con- 
duct should  be  very  explicit.  If,  as  is  the  case  in  certain  states, 
the  statutes  require  the  election  or  appointment  of  inspectors — 
who  are  usually  sworn  to  the  proper  discharge  of  their  duties — 
the  details  of  their  appointment  and  duties  should  be  fully  out- 
lined. If  inspectors  are  not  prescribed  by  statute  and  are  not 
desired,  some  other  method  of  conducting  the  election  should 
be  specified.  It  is  usually  advisable  that  it  be  by  ballot,  though 
this  is  not  essential  save  when  prescribed  by  statute.  If  by 
ballot,  provision  must  be  made  for  the  appointment  of  tellers 
to  collect,  count,  and  announce  the  vote. 

Unless  included  in  the  by-law  on  voting,  any  provisions 


2o6  THE   BY-LAWS 

as  to  cumulative  voting,  or  as  to  classification  of  the  stock  in 
regard  to  voting,  should  be  given  here.  Also,  if  the  directors 
are  classified  so  that  but  one-third  or  one- fourth  are  elected 
each  year,  such  fact  should  be  stated  under  this  heading. 

The  term  for  which  the  directors  are  elected  should  also 
be  stated  clearly.  Usually  this  is  for  the  ensuing  year  and 
until  the  election  of  their  duly  qualified  successors.  The  direc- 
tors hold  until  the  election  of  their  successors  in  any  event, 
but  the  by-laws  should  state  the  fact.^ 

§  189.     Quorum 

In  a  number  of  the  states,  the  proportionate  amount  of 
the  outstanding  stock  which  must  be  represented  at  a  stock- 
holders' meeting  to  constitute  a  quorum  is  fixed  by  statute. 
In  such  case  the  by-laws  can  do  nothing  more  than  repeat  the 
law  in  order  that  it  may  be  remembered  and  observed.  If  the 
statutes  do  not  so  provide,  the  quorum  should  be  distinctly 
prescribed  by  the  by-laws.  If  not  provided  by  either  statute 
or  by-law,  the  common  law  rule  prevails,  that  the  stockholders 
present,  no  matter  how  few  their  number,  constitute  a  quorum. 

In  the  absence  of  any  statutory  provisions  to  the  contrary, 
the  by-laws  may  provide  that  less  than  a  majority  of  the  out- 
standing stock  shall  constitute  a  quorum,  but  for  most  corpo- 
rations it  is  not  safe  to  depart  from  the  usual  parliamentary 
rule  that  a  majority  of  the  outstanding  stock  is  necessary  to 
constitute  a  quorum.  To  illustrate  the  necessity  of  a  careful 
consultation  of  the  statutes  in  this  matter  and  in  matters  of 
corporate  procedure  generally,  attention  may  be  called  to  the 
fact  that  in  New  York  the  by-laws  may  prescribe  the  number 
necessary  to  constitute  a  quorum  at  stockholders'  meetings  for 
ordinary  business,  but  cannot  fix  a  quorum  for  the  election  of 
directors,  those  present  at  any  annual  meeting  being  a  sufficient 
quorum  for  this  purpose  no  matter  how  few  their  number  or 

2  2  Cook  on  Corp.,  §  624;  3  Id.,  §  713. 


PROVISIONS    RELATING   TO    STOCKHOLDERS         207 

how  small  a  proportion  of  the  outstanding  stock  they  repre- 
sent. This  is  but  a  special  application  of  the  general  common 
law  rule  that  those  present  at  a  meeting  of  constituent  mem- 
bers form  a  quorum  and  may  act. 

It  is  to  be  noted  that  this  common  law  rule  applies  only 
to  the  constituent  membership  of  a  body,  such  as  the  stock- 
holders of  a  corporation.  The  directors,  being  a  selected  body, 
require  a  majority  of  the  entire  board  to  constitute  a  legal 
quorum.* 

§  190.     Proxies 

Proxies  play  such  an  important  part  in  all  corporate 
meetings  that  the  by-law  provisions  relating  to  them  should 
be  clear  and  explicit.  At  common  law  the  stockholder  does 
not  have  the  right  to  be  represented  at  corporate  meetings 
by  a  proxy.  The  right  is  given  by  statute  in  many  states,  and 
elsewhere  proxies  may  be  authorized  by  charter  provision,  or, 
in  most  states,  by  by-law  enactment.  Where  created  by  stat- 
ute, the  by-law  provision  must  follow  the  statute. 

§  191.     Order  of  Business 

The  order  of  business  is  purely  formal  but  quite  essential 
to  the  proper  transaction  of  the  corporate  business.  It  may  be 
varied  to  meet  the  needs  of  any  particular  corporation.  The 
order  given  in  the  by-law  forms  indicates  the  usual  and  logical 
arrangement.  The  formal  order  of  business  may  be  suspended 
at  any  meeting,  in  whole  or  in  part,  by  a  majority  vote  of  those 
present,  or  by  their  mere  assent. 


*iMorawetz,  2nd  Ed.,  §476;  2  Kent's  Com.,  §  293;  Matter  of  Rapid  Transit  Ferry, 
15  App.  Div.   (N.  Y.)  S30  (1897). 


CHAPTER   XXVIII 
BY-LAW  PROVISIONS  RELATING  TO  DIRECTORS 


§  192.     General  Considerations 

Regulations  affecting  the  directors  and  any  restrictions 
upon  their  powers  and  action  will,  for  the  most  part,  appear 
only  in  the  by-laws.  Statutory  provisions  of  general  scope 
are  found  in  practically  all  the  states,  more  specific  provisions 
appear  in  some  states,  and  especially  important  matters  are 
sometimes  brought  into  the  charter ;  but  in  the  main  the  stock- 
holders must  look  to  the  by-laws  to  direct  and  control  the 
operations  of  their  directors. 

Much  latitude  is  allowable  in  the  arrangement  of  the  by- 
laws affecting  directors.  In  the  larger  corporation  the  subdi- 
visions are  frequently  carried  further  than  indicated  in  the 
present  chapter;  in  the  smaller  corporations,  ordinarily  not 
so  far. 

Many  of  the  details  appearing  in  the  by-laws  affecting  di- 
rectors are  matters  of  law,  or  are  fixed  by  charter  provision 
and  are  brought  into  the  by-laws  merely  to  save  reference  to 
the  authorities  from  which  they  are  taken. 

§193.     Number  and  Qualifications 

In  many  states  the  number  of  directors  is,  within  certain 
minimum  and  maximum  limits,  fixed  by  statute.  In  some 
states,  as  New  Jersey  and  Massachusetts,  the  minimum  is  pre- 
scribed by  statute  and  any  number  in  excess  of  this  minimum 
may  be  fixed  by  the  by-laws.  In  most  states  the  minimum 
number  of  directors  allowed  is  three. 

For  a  small  or  close  corporation  a  limited  board  of  direc- 
tors is  usually  advantageous.     Such  a  board  is  easily  assem- 

.     208 


PROVISIONS    RELATING   TO    DIRECTORS  209 

bled,  is  likely  to  keep  in  touch  with  the  business,  and  is  gener- 
ally prompt  in  consideration  and  action. 

In  the  larger  corporations  a  more  numerous  directory  is 
usual.  Frequently  this  is  necessary  in  order  to  provide  rep- 
resentation for  the  different  stockholding  interests,  as  well  as 
to  have  the  requisite  managing  representatives  upon  the  board. 
Though  necessary,  the  arrangement  has  many  disadvantages. 
A  quorum  is  only  secured  with  difficulty ;  the  members  are  not 
close  to  the  business  and  are  not  interested  actively  in  its 
management,  and  lengthy  explanations,  much  discussion,  and 
prolonged  consideration  are  the  rule  when  important  questions 
are  really  taken  up.  As  a  result  the  actual  management  of 
the  business  and  of  the  corporate  affairs  is  delegated  to  the 
standing  committees,  the  board  meeting  only  to  listen  to  re- 
ports, or  to  act  in  matters  of  exceptional  importance. 

The  most  common  qualification  required  of  a  director  is 
the  ownership  of  stock.  This  is  usually  regulated  by  statute. 
In  some  states  such  qualifying  stock  must  be  owned  when  the 
director  is  elected.  In  most  states,  if  the  director-elect  is  given 
or  secures  stock  after  his  election,  the  requirements  of  the  law 
are  held  to  be  satisfied.  If  the  statutes  merely  state  that  direc- 
tors must  be  stockholders,  the  ownership  of  one  share  of  stock 
is  sufficient.  If  the  statutes  are  silent  on  the  subject  of  stock 
qualifications  of  directors,  or  if  they  require  merely  that  direc- 
tors be  stockholders,  the  by-laws  may  legally  provide  that 
such  reasonable  number  of  shares  as  may  seem  desirable  shall 
be  the  qualification. 

In  some  states  it  is  provided  that  a  director  parting  with 
his  qualifying  stock  thereby  ipso  facto  ceases  to  be  a  director. 
In  order  to  prevent  any  misunderstanding  on  this  point,  the 
by-laws  should  repeat  the  statute  provision  where  it  exists. 
Elsewhere  it  would  be  prudent  to  state  explicitly  either  that 
the  parting  with  the  qualifying  stock  does  or  does  not  termi- 
nate the  director's  tenure  of  office.    As  a  general  rule  it  would 


2IO  THE   BY-LAWS 

seem  advisable  that  directors  should  be  stockholders  of  the 
corporation  to  some  material  extent,  and  that  if  they  part  with 
this  qualifying  stock  they  should  by  such  disposal  sever  their 
official  connection  with  the  board.     (See  §§  147,  148.) 

If  there  is  any  statutory  requirement  as  to  citizenship  of 
directors,  it  should  be  included  in  the  by-laws. 

§  194.     General  Powers 

At  common  law  the  directors  have  entire  charge  of  the 
property  and  affairs  of  the  corporation  with  full  power  and 
authority  to  manage  and  conduct  the  same.  The  statement 
of  the  general  powers  of  the  directors  as  it  usually  appears  in 
the  by-laws  is  therefore  nothing  more  than  a  reiteration  of 
the  conditions  as  they  exist,  brought  into  the  by-laws  as  a 
matter  of  information.  If  the  powers  of  the  directors  are 
materially  modified  or  restricted  by  the  statutes,  by  the  char- 
ter of  the  corporation,  or  by  the  by-laws  themselves  in  other 
parts,  the  by-law  statement  of  general  powers  should  be  drawn 
to  correspond.     (See  §§  149,  150.) 

§  195.     Term  of  Office 

The  statutes  in  most  states  provide  that  the  directors  shall 
be  elected  annually,  and  shall  hold  over  until  their  successors 
are  elected  and  qualify.  When  the  statutes  so  provide,  no 
by-law  provision  for  a  longer  term  would  be  valid.  In  many 
of  the  states,  however,  classification  whereby  only  part  of  the 
directors  are  elected  each  year  is  provided  for.  The  by-laws 
should  in  any  event  contain  provisions  as  to  the  term  of  office 
of  the  directors,  and  the  provision  that  they  shall  hold  over 
until  their  successors  are  elected  and  qualify. 

§  196.     Classification 

The  usual  object  of  a  classification  of  directors  is  to  pro- 
vide against  any  radical  action  or  sudden  alteration  of  policy 


PROVISIONS    RELATING   TO    DIRECTORS  211 

that  might  occur  if  the  whole  board  were  changed  at  one  time. 
In  perhaps  the  greater  number  of  states  it  must,  when  desired, 
be  secured  through  by-law  provision. 

To  be  effective,  any  such  classification  of  directors  must 
be  permanent  and  therefore,  wherever  possible,  should  be  by 
charter  provision.  If  dependent  only  upon  the  provisions  of 
the  by-laws,  a  majority  of  the  stockholders  might  at  any  time 
assemble  with  due  formality,  repeal  the  by-laws  in  question, 
and  thereby  abrogate  the  whole  arrangement.     (See  §  151.) 

Classification  in  a  small  or  close  corporation  is  generally 
a  useless  and  somewhat  troublesome  formality. 

§  197.     Removal 

It  may  infrequently  happen  that  the  stockholders  wish 
to  have  more  control  over  the  board  than  they  have  under 
the  common  law,  and  wish  to  reserve  to  themselves  the  power 
of  removal  of  directors  without  the  troublesome  procedure 
necessary  to  remove  them  for  adequate  cause. 

If  the  statute  does  not  give  them  this  power,  and  their 
charter  does  not,  provision  may  be  made  in  the  by-laws,  and  a 
director  accepting  office  under  a  by-law  giving  the  stock- 
holders power  of  removal  will  be  bound  thereby.^ 

§  198.     Vacancies 

The  board  of  directors  is  usually  given  power  to  fill 
vacancies  occurring  in  its  own  body.  Unless,  however,  it  is 
so  provided  by  statute,  charter,  or  by-laws,  the  board  does  not 
have  this  power,  and  in  such  event  the  power  is  reserved  to 
the  stockholders.  Any  vacancies  in  the  board  must  then  either 
wait  until  the  next  annual  meeting  with  its  election  of  direc- 
tors, or  be  filled  by  a  special  election,  the  stockholders  being 
called  together  for  the  purpose.^ 


1  Douglass  V.  Merchants'  Ins.  Co.,  ii8  N.  Y.  484  (1890);  Raub  v.  Gerken,  127  Ann. 
Div.   (N.   Y.)  42  (1908). 

2/»  re  Griffing  Iron  Co.,  63  N.  J.  L,  J68,  357  (1899). 


212  THE   BY-LAWS 

As  long  as  the  board  can  assemble  a  quorum  of  its  entire 
membership,  it  may  continue  to  act  despite  vacancies,  but  it  is 
safer  to  keep  the  membership  up  to  the  prescribed  quota,  and 
it  is  almost  an  invariable  rule  to  give  the  board  the  power  to 
fill  vacancies  as  they  occur.  In  this  way  the  board  is  self- 
perpetuating  in  the  intervals  between  the  annual  meetings. 

The  usual  board  vacancies  provided  for  by  the  by-laws 
are  those  caused  by  death  or  resignation.  Beyond  this  the 
by-laws  might  very  properly  provide  that  continued  absence 
from  meetings  of  the  board  should,  in  itself,  vacate  the  posi- 
tion of  the  absentee  director.  In  such  case  the  by-laws  should 
specify  the  exact  number  of  consecutive  absences  from  regu- 
lar meetings,  or  from  regular  and  special  meetings,  necessary 
to  create  a  vacancy. 

By-laws  sometimes  provide  that  in  case  the  membership 
of  the  board  falls  below  the  number  required  for  a  quorum, 
so  that  the  board  is  unable  either  to  transact  business,  or  to 
fill  the  vacancies  and  thereby  re-establish  a  quorum  to  enable 
it  to  transact  business,  a  special  meeting  of  the  stockholders 
shall  be  called  to  elect  such  number  of  directors  as  may  be 
necessary  to  restore  the  board  to  its  normal  membership. 

§  199.     Meetings 

The  frequency  of  regular  meetings  of  the  board  is  to  be 
decided  by  the  particular  conditions.  Monthly  meetings  are 
usual,  but  in  close  corporations  with  a  small  board  it  is  often 
unnecessary  to  meet  regularly  more  than  once  in  each  quarter, 
or  even  once  each  year.  In  case  of  any  emergency  requiring 
action,  a  special  meeting  of  a  small  board  can  be  quickly  and 
easily  called. 

The  by-laws  should  provide  the  time  and  place  of  regular 
meetings  of  the  board,  and  should  make  provision  for  calling 
special  meetings.  The  nature  and  formalities  of  the  call  neces- 
sary to  summon  a  special  meeting  of  the  board  are  purely 


PROVISIONS    RELATING   TO    DIRECTORS  213 

matters  for  the  corporation  to  determine.  Usually  the  presi- 
dent is  given  authority  to  call  such  meetings  at  his  discretion. 
Generally  it  is  provided  also  that  such  meeting  shall  be 
called  upon  written  request  of  a  certain  number — usually  two- 
thirds — of  the  directors.  More  rarely  it  is  provided  that  a 
special  meeting  shall  be  called  upon  the  written  request  of  a 
certain  proportion  in  interest  of  the  stockholders. 

Where  the  board  is  small,  it  is  customary  and  advisable 
to  provide  that  meetings  may  be  held  at  any  time  and  place 
and  without  previous  notice  by  the  unanimous  consent,  or 
unanimous  participation  of  the  board  membership.  Such  a 
provision  would  usually  be  useless  if  the  board  were  large. 

The  place  of  meeting  should  be  fixed  by  the  by-laws, 
though  a  proviso  may  be  added  that  special  meetings  may  be 
held  elsewhere  by  unanimous  consent  of  the  board.  The  office 
of  the  corporation  is  the  proper  place  for  directors'  meetings 
and  they  should  be  held  there  unless  otherwise  agreed  by  all 
the  directors.  To  allow  a  majority  of  the  board  to  call  meet- 
ings in  private  offices,  or  in  places  difficult  of  access,  or  to 
permit  of  adjournment  to  such  places,  except  by  unanimous 
agreement,  is  to  invite  the  gravest  abuses. 

§  200.     Notice  of  Meetings 

It  is  supposed  that  members  of  the  board  are  familiar 
with  the  date  of  regular  meetings.  Hence,  there  is  not  the 
same  legal  necessity  for  notice  that  exists  in  the  case  of  special 
meetings.  It  is  usual  though,  as  a  matter  of  convenience  and 
to  prevent  such  meetings  from  being  overlooked,  to  provide 
that  notice  of  regular  meetings  shall  be  given  by  the  secre- 
tary, and,  where  specially  important  action  is  to  be  taken  at 
any  such  meeting,  notice  of  this  is  also  usually  given.  In  the 
more  comprehensive  sets  of  by-laws  it  is  customary  to  add  a 
proviso  that  failure  to  give  such  notice  shall  not  affect  the 
validity  of  the  meeting  or  of  any  proceedings  thereof.     It  is 


214  THE  BY-LAWS 

not  probable  that  the  proceedings  of  a  regular  meeting  of 
directors  would  in  any  case  be  invalidated  on  account  of  fail- 
ure to  give  notice/  but  the  proviso  is  added  out  of  abundant 
caution. 

Special  meetings,  unless  assembled  with  adequate  notice, 
are  not  legally  called  and  their  action  may  be  set  aside. 
Requirements  as  to  notice  may,  however,  be  waived  and  special 
meetings  be  held  without  notice  by  unanimous  consent,  or  with 
the  participation  of  all  the  directors.  Business  of  any  kind 
may  be  transacted  at  any  meeting  if  all  the  directors  have 
given  written  consent  thereto  or  are  participating  in  the  pro- 
ceedings and  do  not  object. 

Notices  of  special  meetings  of  directors  are  usually  sent 
by  either  mail  or  telegraph  such  reasonable  time  before  the 
meeting  as  will,  under  ordinary  conditions,  permit  the  attend- 
ance of  all  the  members  of  the  board.  The  by-laws  should 
prescribe  the  conditions  of  such  notice.  If  it  is  desirable  to 
notify  directors  of  meetings  by  telephone,  a  provision  author- 
izing such  notice  should  be  given  in  the  by-laws.  Otherwise, 
if  anyone  objected,  such  notice  would  not  be  legally  sufficient. 
The  by-laws  also  usually  reiterate  the  common  law  rule  that 
no  business  except  that  specifically  notified  in  the  call  and 
notice  shall  be  considered  or  acted  upon  at  special  meetings. 

§  201.     Quorum 

If  the  statutes  are  silent  as  to  the  number  of  directors  re- 
quisite for  a  quorum,  the  charter  or  by-laws  will  control.  If 
the  statutes  and  also  the  charter  and  by-laws  are  silent,  the 
common  law  controls  and  a  majority  of  the  full  membership 
of  the  board  is  then  requisite  for  a  quorum. 

If  the  matter  is  regulated  by  the  by-laws,  any  desired 
number  may  be  designated  a  quorum  even  though  this  num- 
ber may  be  much  less  than  a  majority  of  the  board.    It  is  cus- 


•  But  see  Trendley  v.  Illinois  Traction  Co.,  145  S.  W.  (Mo.)  i  (1912). 


PROVISIONS    RELATING   TO    DIRECTORS  21^ 

tomary  and  advisable,  however,  to  require  a  majority  of  the 
entire  board  to  constitute  a  quorum.  Under  such  provision, 
any  reduction  in  the  membership  of  the  board  by  death,  re- 
moval, or  resignation  would  not  affect  the  number  requisite 
to  a  quorum,  which  still  remains  the  same/  The  by-law 
should  be  carefully  worded  to  avoid  any  misunderstanding  on 
this  or  other  points. 

Directors,  on  the  principle  of  delegatus  non  delegare,  can- 
not appear  at  directors'  meetings  by  proxy.  However,  as  a 
matter  of  general  law  and  to  prevent  misunderstandings  and 
dissension,  a  statement  might  be  included  in  this  by-law  that 
directors  cannot  be  represented  by  proxies. 

§  202.     Election  of  Officers 

The  by-laws  should  designate  the  officials  of  the  corpora- 
tion, the  time  of  their  election,  and  the  period  for  which  they 
are  elected.  It  is  also  usual  to  provide  that  they  shall  hold 
office  until  the  election  and  qualification  of  their  successors, 
unless  sooner  removed  by  action  of  the  board.  It  is  also  usu- 
ally specified  that  election  shall  be  by  ballot,  and  that  the  board 
shall  fix  the  compensation  of  officers  and  fill  any  vacancies  that 
may  occur  among  them. 

In  arranging  the  respective  dates  of  the  stockholders* 
annual  meeting  at  which  the  directors  are  elected  and  the 
meeting  of  the  directors  thereafter  at  which  the  officers  are 
usually  elected,  the  latter  meeting  should  not  succeed  the  for- 
mer so  closely  as  to  give  inadequate  time  for  the  notification 
of  newly  elected  directors.  Frequently  such  directors'  meeting 
will  be  arranged  to  follow  the  stockholders'  meeting  on  the 
same  day,  but  a  few  hours  elapsing  between  the  two  meetings. 
If  the  board  be  small  and  any  possible  new  members  readily 
accessible,  or  if  the  entire  membership  be  re-elected,  the  juxta- 
position of  the  two  meetings  is  immaterial.    Where,  however 

*Erie  R.  R.  Co.  v.  City  of  Buffalo,  i8o  N.  Y.  192,  197  (1904). 


2i6  THE   BY-LAWS 

these  conditions  do  not  exist,  it  may  occur  that  some  newly- 
elected  member  of  the  board  fails  to  receive  notice  of  his  elec- 
tion and  of  the  subsequent  directors'  meeting  in  time  to  per- 
mit of  his  attendance.  This  might  prevent  the  election  of  offi- 
cers or  invalidate  it  if  held.  For  this  reason  the  board  meeting 
for  the  election  of  officers  should,  as  a  rule,  be  fixed  at  such 
date  subsequent  to  the  annual  meeting  as  will  give  full  time 
for  the  regular  by-law  notice  of  the  board  meeting. 

It  is  customary  and  entirely  proper  to  provide  that  the 
election  of  officers  shall  follow  the  election  of  the  board  with 
reasonable  closeness,  in  order  that  the  new  board  may  with- 
out delay  elect  its  own  corps  of  officers. 

§  203.     Removal  of  Officers 

.Speaking  generally,  if  an  officer  is  elected  for  a  specified 
term  he  cannot  be  legally  removed  except  for  sufficient  cause, 
and  not  then  until  he  has  had  opportunity  to  appear  in  his 
own  behalf.  In  a  few  states  the  power  to  remove  officers  at 
pleasure  is  given  the  directors  by  statute.  Otherwise,  if  it 
is  desired  that  the  directors  shall  have  the  power  of  removal, 
it  should  be  clearly  conferred  on  them  by  the  by-laws.  The 
by-law  giving  the  power  should  be  explicit,  and  to  be  effec- 
tive should  provide  for  removal  at  pleasure  with  or  without 
cause.  If  such  power  of  removal  is  given  the  directors  by 
the  by-laws,  each  officer  accepts  his  office  subject  to  this  regu- 
lation, knows  upon  what  tenure  he  holds  it,  and  may  there- 
after be  removed  at  the  pleasure  of  the  board  by  a  mere  ma- 
jority resolution.^     (See  §  221.) 

§  204.     Compensation  of  Directors 

Directors  cannot  claim  any  salary  or  compensation  for 
their  services  as  directors  other  than  is  expressly  set  forth 
in  the  by-laws.^     Definite  salaries  might  be  fixed,  but  com- 


^  Douglass  V.  Merchants  Ins.  Co.,  ii8  N.  Y,  484  (1890). 
«Godley  v.    Crandall  &   Godley  Co.,  212  N.  Y.   1^21,   131    (1914)- 


PROVISIONS    RELATING   TO    DIRECTORS  217 

pensation  is  usually  provided  in  the  form  of  a  certain  stipend 
for  attendance  upon  meetings.  The  amounts  paid  for  attend- 
ance at  meetings  vary,  rarely  falling  below  $5  or  exceeding 
$25.  Sometimes  a  certain  fixed  sum  is  appropriated  for  each 
meeting  and  is  divided  among  the  directors  present.  The 
whole  matter  is  one  that  rests  entirely  in  the  discretion  of  the 
stockholders  and  varies  in  different  corporations.    (See  §  220.) 

§  205.     Power  to  Pass  By-Laws 

In  many  of  the  states  the  directors  are,  by  statute,  given 
extensive  powers  over  the  by-laws.  Elsewhere  it  is  a  matter 
for  charter  or  by-law  regulation.  It  is  doubtful  whether  it 
is  wise  in  any  case  to  allow  the  directors  full  power — as  may 
be  done  by  charter  provision  in  New  Jersey — to  override 
by-laws  passed  by  the  stockholders.  The  only  direct  con- 
trol of  the  stockholders  over  the  affairs  of  the  corporation 
is  exercised  through  the  by-laws,  and,  if  the  directors  can 
repeal  and  abrogate  these  by-laws  at  will,  they  are  practically 
unrestrained  in  their  management  of  the  corporate  affairs. 

At  times  it  is  undoubtedly  advantageous  for  the  board 
to  have  some  power  over  the  by-laws  in  order  to  provide  for 
matters  or  emergencies  not  foreseen  by  the  stockholders.  All 
necessary  power  in  this  direction  is,  however,  given  when  the 
board  is  allowed  to  pass  by-laws  in  harmony,  or  not  incon- 
sistent, with  those  passed  by  the  stockholders.  Anything  fur- 
ther is  dangerous  and  susceptible  of  abuse.     (See  §§  97,  150.) 

§  206.     Order  of  Business 

The  order  of  business  at  directors*  meetings  is  a  purely 
formal  regulation  included  in  the  by-laws  as  a  matter  of  con- 
venience. Although  incorporated  in  the  by-laws,  it  is  not 
mandatory,  and  any  item  may  be  passed,  or  the  entire  regular 
order  of  business  may  be  suspended  or  varied  at  the  pleasure 
of  the  board. 


CHAPTER   XXIX 

BY-LAW  PROVISIONS   RELATING  TO  STANDING 
COMMITTEES 

§  207.     Purpose 

In  most  of  the  larger  corporations  the  board  of  directors 
is  composed  of  many  members.  These  are  usually  busy  men, 
sometimes  living  in  different  parts  of  the  country,  and  almost 
always  difficult  to  assemble.  Many  of  them  are  on  the  board 
for  the  sole  purpose  of  representing  special  interests,  and 
without  peculiar  qualiffcations  or  ability  for  the  conduct  of 
the  particular  corporate  business.  Under  such  circumstances 
the  board  is  not  an  efficient  instrument  for  the  direction  of 
the  corporate  affairs  and  something  better  adapted  to  the 
purpose  is  necessary.  The  standing  committee  fills  this  need, 
replacing  the  slow,  cumbrous,  and  uncertain  action  of  a  large 
board  with  the  prompt,  positive,  and  effective  action  of  a  small 
selected  committee. 

Standing  committees  are  permanent  committees  of  the 
board  of  directors  as  opposed  to  committees  of  the  board 
appointed  for  temporary  purposes.  The  membership  of  such 
committees  is  seldom  less  than  three  or  more  than  five.  To 
increase  this  membership  too  greatly  would  involve  the  very 
ills  the  committees  were  created  to  avoid. 

As  many  standing  committees  may  be  appointed  as  the 
conditions  demand.  In  many  cases  the  executive  committee 
alone  is  found  sufficient.  In  others  a  finance  committee  is 
added.  It  is  but  seldom  that  other  standing  committees  are 
necessary. 

If  the  executive  committee  is  the  only  standing  committee, 

218 


PROVISIONS    RELATING    TO    COMMITTEES 


219 


it  is  usually  given  all  the  powers  of  the  board  in  the  interim 
between  board  meetings,  and  becomes  the  active  agent  by 
whom  these  powers  are  exercised.  If  there  is  a  finance  com- 
mittee, such  matters  as  come  within  its  purview  will  be  re- 
served from  the  powers  of  the  executive  committee,  and  the 
two  committees  will  then  between  them  exercise  all  the  pow- 
ers of  the  board.  In  such  case  the  executive  committee  usu- 
ally controls  in  all  general  matters,  while  the  powers  of  the 
finance  committee  are  confined  to  the  management  and  super- 
vision of  the  corporate  finances. 

These  standing  committees,  appointed  with  such  powers, 
are  the  real  managing  bodies  of  the  corporation,  the  board 
merely  supervising  their  operations.  They  usually  act  and 
then  report  their  action  to  the  board.  In  some  cases  where 
they  prefer  to  throw  responsibility  upon  the  board,  or  where 
some  statute  provision  requires  action  of  the  board,  or  when  it 
is  desirable  to  lend  added  weight  to  a  contemplated  measure, 
they  will  report  the  matter  to  the  board  with  a  recommenda- 
tion that  the  desired  action  be  taken. 

It  is  to  be  noted  that  sometimes  an  executive  committee 
is  provided  when  the  board  itself  is  sufficiently  small  to  permit 
of  prompt  action  and  proper  attention  to  the  corporate  busi- 
ness. In  such  case  the  committee  may  become  of  real  injury 
to  the  corporate  interests,  the  few  members  composing  it 
managing  the  entire  business  of  the  corporation  to  the  practical 
and  improper  exclusion  of  the  board.  In  such  cases  the 
directors,  as  a  body,  usually  lose  interest,  board  meetings  are 
neglected,  and  the  executive  committee  controls  without  super- 
vision. 

In  this  same  general  direction  is  to  be  found  the  only 
danger  to  be  apprehended  from  the  employment  of  the  stand- 
ing committee:  the  possibility  that  it  may  be  used  as  a  con- 
venient means  for  the  elimination  of  the  board — or  certain 
elements  of  the  board — from  control  of  the  corporate  affairs, 


220  THE  BY-LAWS 

the  real  management  of  the  corporation  being  placed  in  the 
hands  of  the  selected  few  who  constitute  the  committees. 
This  danger  can  be  avoided  only  by  careful  definition  and 
judicious  regulation  of  the  powers  of  these  committees,  this 
to  be  done  in  the  charter  or  by-law  provisions  by  which  they 
are  created.* 

§  208.     Appointment 

The  standing  committees  are  usually  created  and  empow- 
ered, and  the  manner  of  appointing  or  electing  their  members 
prescribed,  by  charter  or  by-law  provisions.  Since  the  powers 
of  the  board  are  to  a  greater  or  less  degree  to  be  delegated 
to  these  committees,  they  must  be  composed  of  members  of  the 
board.  The  provisions  as  to  the  appointment  of  members  are 
therefore  confined  to  the  manner  of  their  selection  from  this 
body.  Sometimes  the  creating  provision  will  provide  that 
certain  officials  of  the  board  shall  constitute  the  standing 
committees,  as  for  instance  that  the  president,  vice-president, 
and  treasurer  shall  constitute  the  executive  committee.  Gen- 
erally the  treasurer  is  designated  as  a  member  of  the  finance 
committee.  Also  it  is  quite  usual  to  provide  that  the  presi- 
dent of  the  company  shall  ex  officio  be  a  member  of  the  ex- 
ecutive committee,  and  sometimes  it  is  provided  that  he  shall 
be  a  member  and  the  presiding  officer  of  all  standing  com- 
mittees. At  times  it  is  provided  that  the  president  shall' ap- 
point the  different  standing  committees.  The  most  common, 
and  perhaps  the  safest,  plan  leaves  the  membership  of  these 
committees  to  be  decided  by  an  election  in  the  board. 

If  there  is  any  danger  of  the  committees  being  used  as 
a  device  to  exclude  minority  interests  from  management  of 
the  corporate  affairs,  the  charter  or  by-laws  may  prescribe 
such  majority  vote  of  the  board  for  the  election  of  their 
members  as  to  require  the  aid  of  the  minority  to  elect.    A  pro- 

*  See  3  Cook  on  Corp.,  §  715. 


PROVISIONS    RELATING   TO    COMMITTEES         221 

vision  of  this  kind  might  result  in  a  deadlock,  but  in  that  case 
the  board  would  continue  in  the  direct  management  of  the  cor- 
porate interests  until  some  agreement  was  reached  and  accept- 
able standing  committees  elected. 

There  is  no  general  rule  as  to  the  appointment  or  selec- 
tion of  officers  for  the  standing  committees.  In  some  cases 
they  are  designated  by  the  creating  provisions,  in  others  they 
are  elected  by  the  board,  while  in  many  cases  the  selection  of 
officers  is  left  to  be  decided  by  each  committee  for  itself. 
It  is  probably  simplest  and  most  satisfactory  to  provide  that 
the  chairman  of  each  committee  shall  be  designated  by  the 
board.  The  only  other  necessary  officer  is  the  secretary.  At 
times  it  is  provided  that  the  secretary  of  the  corporation  shall 
also  act  as  secretary  of  the  committees.  If,  however,  there  is 
more  than  one  standing  committee,  and  especially  if  these 
committees  are  active,  it  may  be  found  advantageous  for  each 
committee  to  have  a  distinct  recording  official  who  may  or 
may  not  be  a  member  of  that  committee. 

§  209.     Composition 

The  membership  of  the  standing  committees  must  be 
confined  to  the  membership  of  the  board,  otherwise  the  power 
of  the  board  to  delegate  its  authority  to  the  committees  would 
be  more  than  questionable,  and  the  action  of  such  committees 
be  of  doubtful  legality. 

Within  this  limitation,  the  standing  committees  should 
be  formed  on  the  principles  of  specialization.  Those  most 
familiar  with  the  corporate  business  and  most  capable  in  its 
practical  management  will  naturally  be  grouped  as  the  execu- 
tive committee.  Those  of  most  skill  and  standing  in  financial 
matters  will  properly  be  selected  for  the  membership  of  the 
finance  committee.  Other  considerations  frequently  intervene 
to  prevent  this  ideal  formation  of  the  standing  committees, 
but  the  nearer  it  is  attained  the  better  will  be  the  results. 


222  THE   BY-LAWS 

The  creating  provisions  not  uncommonly  provide  that  the 
president,  vice-president,  and  treasurer,  with  or  without  addi- 
tional members,  shall  constitute  the  executive  committee. 
These  officers  being  elected  by  the  board  to  the  positions  they 
already  occupy,  are  presumably  men  of  executive  ability, 
familiar  with  the  corporate  affairs  and  therefore  peculiarly 
qualified  to  act  as  members  of  the  managing  committee.  On 
the  other  hand,  such  appointment  adds  materially  to  the  re- 
sponsibility, the  power,  and  the  importance  of  these  officials 
and  may  for  that  reason  at  times  be  unadvi sable. 

The  treasurer  should  obviously  be  a  member  of  the  finance 
committee  unless  special  reasons  to  the  contrary  exist.  If  a 
member  of  the  finance  committee  he  should  not  ordinarily 
also  act  on  the  executive  committee. 

§  210.     Powers 

There  is  no  doubt  that  the  board  may  legally  delegate  its 
authority  to  properly  constituted  standing  committees.^  This 
delegated  authority  may  be  co-extensive  with  the  powers  >f 
the  board  in  the  interim  between  board  meetings,  or  may  be 
limited  to  certain  specified  actions  or  lines  of  action.  It  has 
been  held  that  the  ''full  powers'*  of  the  board  in  the  interim 
between  board  meetings  are  limited  to  conducting  the  ordi- 
nary business  operations  of  the  corporation.^  The  extent  of 
the  power  to  be  delegated  to  the  standing  committees  is  usually 
fixed  by  the  charter  or  by-law  provisions  by  which  the  com- 
mittees are  created,  though  it  may  be  left  to  be  determined 
by  the  board  itself.  If  the  powers  of  the  standing  committees 
are  fixed  by  the  creating  provisions,  the  board  cannot  dele- 
gate powers  in  excess  of  those  prescribed. 

The  creating  provisions  frequently  go  into  detail  as  to  the 
powers    and    duties    of    such    committees.      These    powers 

2  The   Sheridan   El.    L.    Co.    v.    The   Chatham   Nat.    Bank,    127.  N.   Y.   517   (1891); 
Kavanagh  v.  Gould,  147  App.  Div.  (N.  Y.)  281   (1911). 
•Hayes  v,  Canada,  etc.,  S.  S.  Co.,  181  Fed.  2^  (1910). 


PROVISIONS    RELATING   TO    COMMITTEES         223 

should  be  carefully  defined,  and,  speaking  generally,  should 
not  be  too  extended.  Standing  committees  should  be 
required  to  keep  full  and  adequate  written  records  of  their 
proceedings,  and  these  records  should  be  open  to  inspection  by 
members  of  the  board.  Frequent  reports  to  the  board  are 
desirable. 

Properly  constituted  and  empowered,  and  within  the 
limits  of  their  authority,  standing  committees  act  with  the 
same  binding  force  and  effect  as  the  board  itself.  Their  con- 
tracts are  not  affected  by  any  subsequent  disapproval  of  the 
board,  nor  can  the  corporation  refuse  to  carry  out  any  of 
their  proper  undertakings. 

§211.     Procedure 

The  standing  committees  act  as  do  other  parliamentary 
bodies.  Their  usual  offtcers  are  a  chairman  and  secretary, 
and  these  officers  perform  the  customary  duties.  Regular 
meetings  may  be  provided  for  by  the  by-laws  with  full  pro- 
vision as  to  their  conduct  and  record,  or  the  matter  may  be 
left  to  the  committees.  Owing  to  their  compactness  and  the 
manner  in  which  they  are  constituted,  the  standing  commit- 
tees are  easily  assembled  and  a  large  portion  of  the  business 
of  such  committees  is  usually  accomplished  in  special  meet- 
ings, either  regularly  called  or  assembled  by  unanimous  con- 
sent. 

All  special  meetings  should  be  duly  notified  to  the  members, 
and  in  the  case  of  "consent  meetings"  the  consent  or  participa- 
tion of  every  member  must  be  secured.  If  it  is  desirable  to 
notify  members  of  meetings  by  telephone,  a  provision  au- 
thorizing such  notice  should  be  made  part  of  the  by-laws. 
Otherwise,  if  anyone  objected,  such  notice  would  not  be 
legally  sufficient.  All  decisions  reached  and  action  taken 
should  be  expressed  in  duly  adopted  resolutions,  and  minutes 
should  be  kept  containing  a  faithful  record  of  all  committee 


224  '^^^   BY-LAWS 

proceedings.  These  proceedings  should  from  time  to  time  be 
reported  to  the  board,  either  by  direct  report  or  by  the  read- 
ing of  the  committee  minutes.  Vacancies  in  the  committees 
should  be  filled  as  prescribed  by  the  by-laws,  usually  either  by 
the  committee  itself  or  by  action  of  the  board,  except  in  the 
case  of  an  ex-officio  member,  who  succeeds  to  his  position 
on  the  committee  by  virtue  of  his  election  to  official  position 
in  the  corporation  without  further  formality. 

A  majority  of  a  standing  committee,  unless  otherwise  ex- 
pressly provided,  constitutes  a  quorum,  and  a  majority  of  that 
quorum  has  power  to  act.*  A  standing  committee  cannot  dele- 
gate its  power  to  one  or  more  of  its  members,  but  must  act  as 
a  board.  It  may  be  prudent  to  provide  that  the  affirmative 
vote  of  a  majority  of  the  whole  committee  shall  be  necessary 
for  action.  This  does  not  necessitate  any  increase  in  the  num- 
ber necessary  to  a  quorum,  but  if  a  mere  common-law  quorum 
be  present  the  affirmative  vote  of  all  the  members  present  is 
required  to  secure  action. 


*  Young  V.  Canada,  etc.,  Co.,  97  N.  E.  (Mass.)  1098  (1912). 


CHAPTER    XXX 

BY-LAW  PROVISIONS  RELATING  TO  OFFICERS 

§212.     Enumeration 

The  term  officers  is  here  applied  to  those  agents  of  the 
corporation  appointed  or  elected — usually  by  the  board  of 
directors — as  the  direct  executive  representatives  of  the  board 
and  of  the  corporation.  The  directors  are  themselves  at  times 
styled  officers,  and  with  legal  correctness/  but  to  avoid  con- 
fusion the  directors  are  not  designated  as  officers  in  the  pres- 
ent volume. 

In  regard  to  the  corporate  officers  and  their  duties  the 
statutes  are  usually  silent,  the  charter  seldom  takes  cognizance 
of  anything  pertaining  to  them,  and  the  by-laws  therefore  con- 
trol. Under  these  circumstances  the  stockholders  as  the  by- 
law-making power  have  wide  discretion.  They  fix  the  num- 
ber, titles,  qualifications,  duties,  method  of  election,  and  all 
other  details  relating  to  the  officers,  and  their  wishes  as  ex- 
pressed in  the  by-laws  prevail.  If  not  covered  in  the  by-lav/s, 
such  matters  are  regulated  by  common  or  parliamentary  law 
or  custom,  or,  as  to  some  of  these  matters,  are  determined 
by  the  directors. 

The  necessary  officers  of  a  corporation  are  the  president, 
secretary,  and  treasurer.  In  the  smaller  corporations  two  of 
these  offices  are  sometimes  held  by  one  person.  In  most  cases, 
however,  the  number  of  officers  is  increased,  according  to  the 
needs  of  the  particular  corporation,  by  the  addition  of  one  or 
more  vice-presidents,  a  managing  director  or  general  manager, 
a  chairman  of  the  board,  counsel,  and  an  auditor.  The  offi- 
cials named  are,  for  the  most  part  elective,  and,  with  the  oc- 


I  Cook  on  Corp.,  §  ic 

225 


226  THE   BY-LAWS 

casional  exception  of  the  general  manager,  are  supposed  to 
report  directly  to  the  board  or  to  one  of  the  standing  commit- 
tees. The  general  manager  in  some  corporations  reports  to 
the  president  or  other  designated  official.  Outside  of  the  ex- 
ecutive officials,  other  agents  and  employees  are  not  officers, 
and  but  seldom  come  in  contact  with  the  board. 

The  election  of  officers  naturally  follows  closely  on  the 
election  of  directors,  and  is  usually  held  as  soon  thereafter  as 
the  newly  elected  board  can  be  properly  assembled. 

The  president  and  vice-president  are  chosen  from  the 
board  itself,  as  they  may  be  called  upon  to  preside  at  its  meet- 
ings. This  is  not  necessary  in  regard  to  the  other  officers, 
though  the  treasurer  is  frequently  chosen  from  the  member- 
ship of  the  board,  and  other  officials  are  so  selected  when  con- 
venient. .The  treasurer  of  the  larger  corporations  is  usually 
selected  on  the  basis  of  his  financial  standing  or  ability.  It 
would  seem  obvious  that  the  corporate  officials  should  all  have 
special  qualifications  and  a  knowledge  of  the  duties  of  their 
positions,  though  other  considerations  frequently  prevail. 

§  213.     Presiding  Officers 

The  president  is  the  usual  presiding  officer.  His  duties 
vary  widely  according  to  the  size  and  character  of  the  corpora- 
tion. In  the  smaller  corporations  he  is  frequently  assigned 
the  active  management  of  the  business  in  addition  to  the  duties 
more  strictly  pertaining  to  his  office.  In  the  larger  corpora- 
tions the  duties  incident  to  the  president's  office  are  frequently 
allotted  in  greater  or  less  degree  to  other  officers.  If  a  chair- 
man of  the  board  exists,  that  official  presides  at  all  meetings 
of  the  board.  If  there  is  a  chairman  of  the  finance  committee, 
he  takes  over  the  supervision  and  direction  of  the  financial 
matters  usually  assigned  to  the  president.  At  times  certain  of 
the  duties  ordinarily  pertaining  to  the  president  are  performed 
by  the  vice-presidents. 


PROVISIONS    RELATING   TO    OFFICERS  227 

.  When  the  office  of  chairman  of  the  board  exists,  its  duties 
should  be  clearly  defined  by  the  by-laws.  As  the  chairman  of 
the  board  presides  at  meetings  of  the  board,  the  general  rule 
that  the  president  must  be  a  member  of  the  board  is  not  so 
imperative  when  a  chairman  is  provided.  Even  in  such  case, 
however,  if  the  president  is  to  be  the  chief  executive  of  the 
company,  he  must  almost  of  necessity  be  present  at  meetings 
of  the  directors,  participate  in  their  discussions  and  delibera- 
tions, and  should  therefore  be  a  member  of  the  board. 

Vice-presidents,  designated  and  ranked  as  first,  second, 
third,  and  so  on,  may  be  provided  for  in  accordance  with  the 
corporate  needs.  These  perform  the  duties  of  the  president 
in  the  absence  of  that  official,  or  of  the  ranking  official,  in  the 
order  of  precedence.  In  addition,  in  the  larger  corporations 
active  functions  are  usually  provided  for  several  of  the  vice- 
presidents.  Frequently  their  number  is  swelled  merely  to 
afford  honorary  positions  for  members  of  the  board.  Heads 
of  departments  are  sometimes  made  vice-presidents  as  a 
''broadening"  measure,  tending  to  avoid  the  friction  and  the 
jealousies  that  so  often  exist  between  departments.  In  the 
smaller  corporations,  the  duties  of  the  vice-president  are  some- 
times assigned  to  the  treasurer,  or  this  latter  is  elected  as  vice- 
president  and  treasurer.     (  See  §  1 84. ) 

The  presiding  officers  of  the  standing  committees  are 
usually  provided  for  either  by  the  by-laws  or  by  action  of  the 
board,  but  are  sometimes  left  for  the  committees  to  elect. 
The  president  of  the  company  is  usually  president  of  the 
executive  committee ;  the  treasurer  is  frequently  placed  at  the 
head  of  the  finance  committee. 

§  214.     Secretary 

The  duties  of  the  secretary  should  be  fully  and  explicitly 
prescribed  in  the  by-laws,  especially  as  to  signatures.  He 
would  naturally  have  charge  of  the  corporate  seal  and  affix  and 


228  THE   BY-LAWS 

attest  it  when  necessary,  though  the  president  is  occasionally 
authorized  thereto  as  well.  Unless  the  statutes  call  for  the 
signatures  of  the  president  and  treasurer  to  stock  certificates, 
the  secretary  is  commonly  designated  to  sign  such  certificates 
with  the  president.  He  generally  has  entire  charge  of  the  de- 
tails of  the  issue  and  recording  of  stock.  The  corporate 
records  are  entrusted  to  him,  and  the  various  state  reports  are 
usually  prepared  by  him.  His  powers  and  duties  as  to  signing 
contracts  are  entirely  dependent  upon  the  by-laws  or  condi- 
tions of  the  particular  corporation.  Usually  he  sign  with  the 
president,  but  frequently  the  president  signs  alone  or  with  the 
treasurer,  or  the  matter  is  decided  in  each  important  instance 
by  resolution  of  the  board.  When  the  secretary's  signature  is 
not  affixed  to  sealed  contracts,  it  should  appear  on  such  instru- 
ment in  attestation  of  the  seal. 

§  215.    Treasurer 

The  treasurer  is  usually  given  full  charge  of  the  corporate 
finances  and  all  that  immediately  relates  thereto ;  also  the  cus- 
tody of  all  corporate  instruments  and  evidences  of  value.  He 
signs  all  checks,  with  or  without  the  president  as  the  by-laws 
or  directors  may  prescribe,  and  participates  in  the  execution 
of  all  instruments  pertaining  to  the  financial  transactions  of 
the  corporation.  The  by-laws  should  clearly  define  the  extent 
of  the  treasurer's  powers  and  responsibilities. 

Whenever  the  treasurer's  position  involves  the  handling 
or  possession  of  large  sums  of  money,  or  of  considerable  prop- 
erty values,  he  should  be  required  to  give  bond.  In  a  small 
corporation,  or  one  where  the  responsibilities  of  the  treasurer 
are  light,  such  requirement  is  an  unnecessary  formality. 

The  finance  committee,  if  such  a  committee  exists,  takes 
on  itself  many  of  the  duties  and  responsibilities  of  the  treas- 
urer, and,  unless  that  official  is  chairman  of  the  finance  com- 
mittee, renders  his  position  much  less  onerous. 


PROVISIONS    RELATING  TO    OFFICERS  229 

§  216.     Managing  Officers 

The  position  of  managing  director  is  found  only  in  the 
larger  corporations,  and  the  position  and  duties  of  this  offi- 
cial are  often  somewhat  indeterminate.  In  some  case  his 
duties  are  practically  those  of  the  general  manager ;  in  others 
he  is  given  much  of  the  power  and  many  of  the  duties  of  the 
president.  At  times  the  position  is  in  the  nature  of  a  compro- 
mise, the  duties  of  the  managing  director  being  carved  from 
those  of  the  president  and  general  manager. 

The  position  of  managing  director  is  supposed  to  be  more 
dignified  than  that  of  the  general  manager.  Its  duties  should 
be  clearly  prescribed  by  the  by-laws  in  order  to  prevent  pos- 
sible conflicts  of  authority.  This  is  the  more  necessary,  as 
the  duties  of  the  position  are  not  so  definite  or  so  well  under- 
stood as  those  of  the  other  officials,  and  custom  cannot  be  re- 
ferred to  for  missing  details. 

The  general  manager  is  accounted  an  officer  of  the  com- 
pany— in  contradistinction  to  the  employees — only  because  he 
is  selected  by  and  usually  reports  to  the  board.  His  position 
generally  differs  materially  from  that  of  the  other  officials. 
At  times  he  is  instructed  to  report  and  act  under  the  direction 
of  the  president,  and,  if  the  by-laws  did  not  specifically  provide 
for  the  election  of  a  general  manager,  the  directors  would  have 
authority  to  appoint  or  employ  such  official  and  prescribe  his 
duties  and  salary,  just  as  they  might  employ  any  other  neces- 
sary agent  or  employee  of  the  company.  In  such  case  the  usual 
laws  and  customs  relating  to  his  employment  would  control. 

§217.     Counsel;  Auditor 

In  the  larger  corporations  an  attorney  is  usually  retained 
as  a  regular  and  permanent  feature  of  the  management.  Such 
official  has  no  original  powers,  even  his  control  of  litigation 
being  subject  to  the  direction  of  the  board,  or,  if  it  be  so 
referred,  to  one  of  the  standing  committees. 


230  THE   BY-LAWS 

In  the  smaller  corporations  by-law  provision  for  counsel 
is  not  usual,  the  board  being  left  to  employ  legal  assistance  at 
such  times  and  on  such  terms  as  it  may  deem  expedient.  The 
employment  of  counsel  then  becomes  merely  a  matter  of  con- 
tract. 

The  compensation  of  counsel,  when  regularly  retained,  is 
usually  fixed  at  some  minimum  amount,  which  is  considered 
a  retainer,  any  further  payments  depending  upon  the  serv- 
ices rendered. 

The  auditor  is  usually  an  essential  officer  of  the  larger 
corporations.  Where  the  work  that  may  properly  be  referred 
to  the  auditor  is  not  sufficient  to  justify  his  regular  employ- 
ment, the  by-laws  may  provide  for  periodical  audits,  or  the 
whole  matter  may  be  left  to  the  discretion  of  the  board.  Where 
the  volume  of  corporate  business  is  at  all  large,  the  employ- 
ment of  an  auditor  or  some  provision  for  suitable  audits  of 
the  corporate  books  and  accounts  is  a  usual  and  advisable 
precaution. 

§218.     Assistant  Officers 

The  president  is  usually  well  provided  with  assistants  in 
the  vice-presidents.  An  assistant  treasurer  is  not  unusual. 
In  the  larger  corporations  an  assistant  secretary  is  frequently 
appointed. 

Such  official  duties  as  the  board  may  deem  expedient  are 
delegated  to  these  assistant  officers,  or  their  duties  may  be 
prescribed  at  discretion  by  the  officials  they  assist.  In  any 
event,  the  by-laws  should  clearly  prescribe  their  status  and 
manner  of  appointment.  If  these  assistant  officers  are  to  per- 
form the  duties  of  their  principals  in  the  absence  of  these 
latter,  the  by-laws  should  so  prescribe. 

In  the  smaller  corporations  assistant  officers,  outside  of 
the  vice-presidents,  are  an  unnecessary  and  possibly  complicat- 
ing addition  to  the  corporate  mechanism. 


PROVISIONS   RELATING  TO   OFFICERS 


231 


§  219.     Delegation  of  Official  Powers 

Exigencies  may  arise  in  which  it  may  be  desirable  or  even 
necessary  for  one  corporate  official  to  exercise  the  powers  and 
perform  the  duties  of  another,  in  whole  or  in  part.  The  board 
would  have  authority  to  delegate  temporarily  the  powers  of 
certain  officers  under  such  circumstances  without  special  by- 
law provision,  but,  to  save  question  and  possible  trouble,  the 
power,  if  likely  to  be  necessary,  should  be  specifically  conferred 
by  the  by-laws.  One  official  cannot  delegate  his  powers  to 
another,  even  temporarily  in  any  material  matter,  unless  spe- 
cially authorized  thereto  by  the  by-laws  or  action  of  the  board. 

§  220.     Salaries 

Unless  it  is  specified  that  officers  are  to  receive  salaries, 
they  are  not,  as  a  rule,  entitled  to  charge  for  their  official  serv- 
ices.^ Neither  is  it  ordinarily  legal  for  the  directors  to  vote 
compensation  for  such  official  services  after  they  are  per- 
formed.^ To  avoid  misunderstanding,  however,  the  condi- 
tions, whatever  they  may  be,  should  be  clearly  stated  in  the 
by-laws — that  the  officers  of  the  corporation  shall  receive  no 
salaries,  or  that  the  officers  shall  receive  only  such  compen- 
sation for  their  services  as  the  board  may  designate  at  the  time 
of  their  appointment,  or  that  the  officers  shall  receive  the  spe- 
cified salaries,  stated  in  the  by-laws.  The  whole  matter  is  one 
to  be  adjusted  from  a  business  standpoint  and  much  trouble 
is  likely  to  be  saved  by  a  definite  arrangement.* 

If,  however,  such  an  officer  is  neither  stockholder  nor 
director  of  the  company  and  stands  in  no  relation  which  would 
make  it  his  interest  to  serve  without  compensation,  there  will 
be  a  prima  facie  obligation  to  pay  him.^ 


'  Hayes  v.  Canada,  etc..  S.  S.  Co.,  181  Fed.  289  (1910). 

3  Lewis   V.    Matthews,   161   App.   Div.    (N.   Y.)    107   (1914) ;   Ellis  v.   Ward,  137  I"- 

^°^  *  See  Henry  Woods  Sons'   Co.  v.  Schaefer,  175  Mass.  443  (1899) ;  Met.  El.   R.  Co. 
V.   Kneeland,  120  N.  Y.  134  (1890). 

6  Smith  V.  Long  Island  R.  R.  Co.,  102  N.  Y.  igo  (1886). 


232  THE  BY-LAWS 

Officers  who  are  also  directors  cannot  vote  salaries  to 
themselves  even  though  they  are  also  holders  of  a  majority 
of  the  stock.®  But  an  officer  who  is  also  a  stockholder  and 
director  may  recover  for  services  rendered  outside  his  official 
duties  if  such  services  are  authorized  by  the  directors/ 

§221.     Removals;  Vacancies 

The  power  to  remove  officers  and  to  fill  vacancies  among 
them,  when  given  the  directors,  is  usually  provided  for  in  the 
by-laws  under  the  head  of  "Directors."  (See  §  203.)  It  would 
be  proper,  however,  to  repeat  any  powers  given  the  board  in 
this  direction,  in  a  short  by-law  under  the  heading  of  officers, 
or  the  ground  might  be  covered  by  a  reference  to  the  by-law 
by  which  this  power  was  conferred.  If  the  occasion  arises 
for  the  exercise  of  the  power  of  removal,  or  it  becomes  neces- 
sary to  fill  a  vacancy,  there  should  be  no  possible  basis  for 
any  doubt  or  question  as  to  the  authority  of  the  board  to  act. 


•Tacobson  v.  B.  Lumber  Co.,  184  N.  Y.  152  (1906);  Davids  v.   Davids,  135  A.   D. 

'  BagD. 
15a  U.  S.  405  (1893). 


(N.  Y.)  ao6  (i9op). 

'  Bagby  v,  Carthage,  etc.,  Co.,  165  N.  Y.  179  (1900) ;  Corinne  Mill  Co.  v.  Toponce, 


CHAPTER   XXXI 

BY-LAW  PROVISIONS  RELATING  TO  DIVIDENDS 
AND  FINANCE 

§  222.     General 

All  those  by-law  provisions  directly  relating  to  the  finan- 
cial management  of  the  corporation  are  usually  grouped  under 
the  general  heading  of  ''Dividends  and  Finance."  Any  de- 
sired limitations  on  the  control  exercised  by  the  directors  over 
the  finances  of  the  corporation,  and  any  directions  as  to  the 
management  of  these  finances,  must,  unless  incorporated  in  the 
charter,  appear  in  the  by-laws.  Otherwise  the  directors  are 
in  complete  control,  except  as  restrained  by  statute  law. 

It  is  to  be  noted  that  any  restrictions  on  the  salaries  of 
officials,  if  of  a  general  nature,  should  appear  in  the  by-laws 
relating  to  finance.  If  the  amount  of  each  official  salary  were 
fixed,  such  limitations  might  appear  under  "Dividends  and 
Finance,"  but  would  also  be  included  in  the  by-laws  relating 
to  the  officers  affected. 

§  223.     Dividends 

By-law  provisions  as  to  dividends  are  for  the  most  part 
merely  declaratory  of  the  common  or  statutory  law  on  the  sub- 
ject. Their  inclusion  in  the  by-laws  is  very  desirable,  not  only 
on  account  of  the  importance  of  the  matter,  but  because  the 
statutory  or  common  law  provisions  against  illegal  dividends 
are  otherwise  frequently  overlooked  or  disregarded. 

§  224.     Reserve  Funds 

In  most  of  the  states  the  directors  have  full  power,  unless 
otherwise  provided  by  charter  or  by-laws,  to  set  aside  any 

233 


234 


THE   BY-LAWS 


portion  or  all  of  the  corporate  profits  at  their  discretion,  as  a 
reserve  fund  or  for  the  purpose  of  accumulating  a  working 
capital.  In  New  Jersey,  on  the  contrary,  the  directors,  unless 
otherwise  expressly  authorized  by  charter  or  by-laws,  must 
annually  distribute  all  the  corporate  profits  as  dividends.  Such 
compulsory  distribution  of  profits  might  at  times  be  prejudicial 
and  even  disastrous  to  the  corporate  interests,  and  accord- 
ingly, it  is  usual  in  New  Jersey  to  authorize  the  accumulation 
of  a  reserve  fund  by  charter  or  by-law  provision. 

In  other  states  the  matter  of  reserves  is  sometimes  left 
entirely  to  the  discretion  of  the  directors,  but  is  usually  regu- 
lated by  suitable  provisions  in  the  by-laws.  The  minimum  re- 
serve fund  to  be  maintained  will  be  prescribed,  in  which  case 
no  dividends  must  be  paid  while  the  reserves  are  below  this 
minimum,  or  a  stipulated  annual  dividend  will  be  required 
from  the  annual  profits  before  anything  is  passed  to  the  re- 
serve, or  a  certain  percentage  of  the  annual  profits  will  be 
passed  to-  the  reserve  fund.  Whatever  the  arrangement  it 
should  be  so  clearly  expressed  as  to  admit  of  no  misunder- 
standing-. 


'&• 


§  225.     Limitations  of  Debt 

By-law  restrictions  upon  the  power  of  the  directors  to 
incur  debts  are  not  uncommon.  These  limitations  are  of  vari- 
ous forms.  At  times  the  debt-incurring  power  of  the  board 
will  be  limited  to  a  stated  gross  amount  which  must  not  be 
exceeded  without  special  authorization  by  the  stockholders; 
or  it  may  be  provided  that  such  limit  of  indebtedness  shall 
not  be  exceeded  unless  authorized  by  a  specified  majority  of 
the  directors,  as  a  two-thirds  vote  of  the  entire  board,  or 
perhaps  by  unanimous  action  of  that  body.  Occasionally  the 
board  will  be  restricted  as  to  the  amount  of  any  one  contract 
or  obligation,  as  for  instance  that  no  contract  or  obligation 
involving  liabilities  of  more  than  $10,000  shall  be  entered  into 


PROVISIONS    RELATING   TO    FINANCE 


235 


or  incurred  by  the  board  unless  specifically  authorized  thereto 
by  resolution  of  the  stockholders. 

The  advisability  of  such  limitations  is  open  to  question. 
Peculiar  cases  will  undoubtedly  arise  where  such  restrictions 
are  desirable,  and  at  timrs  they  are  necessary,  but  as  a  gen- 
eral rule  it  would  seem  better  to  elect  a  responsible  board 
rather  than  to  attempt  to  place  restraints  upon  its  action.  (  See 
§§  149.  158.) 

§  226.     Bank  Deposits 

The  by-law  provisions  as  to  the  corporate  bank  deposits 
are  important  and  should  be  very  explicit  in  their  terms.  They 
should  prohibit  absolutely  any  irregular  retention  or  disposi- 
tion of  the  funds  by  the  treasurer,  and  provide  that  all 
moneys  coming  into  his  hands  be  promptly  deposited  in  the 
name  of  the  company.  This  latter  point  should  be  covered 
specifically  and  clearly  by  the  by-laws,  as  the  practice  of  allow- 
ing deposits  to  be  made  in  the  individual  name  of  the  treas- 
urer, or  in  his  name  as  treasurer,  is  a  standing  invitation  to 
irregularities  and  resulting  trouble. 

The  by-laws  should  also  prescribe  the  signature  to  cor- 
porate checks.  Practice  varies  as  to  this  matter  but  unless 
there  is  reason  for  doing  otherwise  checks  should  be  signed 
with  the  company  name,  affixed  by  the  treasurer  and  verified 
by  his  signature,  with  usually  a  countersignature  affixed  by 
the  president. 

The  by-laws  relating  to  bank  deposits  should  cover  the 
ground  fully  and  clearly,  leaving  nothing  to  the  discretion  of 
the  board  or  finance  committee  save  the  designation  of  the 
depositaries. 


CHAPTER   XXXII 

SUNDRY  PROVISIONS 

§  227.     General 

Under  this  head  will  come  all  those  by-laws  that  cannot 
be  included  under  the  titles  already  discussed  and  that  are  too 
few  or  unimportant  to  justify  separate  classification.  Some 
of  these  matters  are  of  particular  application.  A  few  of 
general  application  are  found  in  all  complete  sets  of  by-laws 
and  are  considered  in  the  following  sections  of  the  present 
chapter. 

§  228.     Corporate  Seal 

It  is  customary  to  prescribe  the  details  of  the  corporate 
seal  in  the  by-laws,  the  provision  being  usually  so  worded  as 
to  serve  as  a  formal  adoption  of  the  described  seal.  This  seal 
usually  gives  the  corporate  name,  the  year,  and  the  state  of  in- 
corporation. These  are  customary,  but  unless  prescribed  by 
statute  are  not  essential,  as  any  other  wording  or  device,  if 
properly  adopted,  would  be  the  legal  seal  of  the  corporation. 
Any  additional  designs,  mottoes,  or  ornamentation  may  be 
added  as  desired  and  will  neither  add  to,  nor  detract  from,  the 
legal  effectiveness  of  the  seal. 

§  229.     Penalties 

The  enforcement  of  by-laws  by  means  of  penalties  is  of 
doubtful  utility.  Cases  may  arise  where  penalties  may  be 
profitably  employed,  but  usually  such  measures  are  futile  and 
inadequate.  Where  the  power  of  removal  exists,  persistent 
disregard  of  the  by-laws  by  officials  of  the  corporation  would 

236 


SUNDRY    PROVISIONS 


237 


undoubtedly  be  proper  grounds  for  the  exercise  of  this  power. 
If  such  power  is  not  given  by  the  by-laws  or  statutes,  ofificial 
disregard  of  the  by-laws  would  probably  be  sufficient  reason 
for  a  removal  on  common-law  grounds.  If  the  directors  act 
in  disregard  of  the  requirements  of  the  by-laws,  such  action 
is  illegal,  and  the  personal  liability  that  may  follow  is  a  much 
more  effective  penalty  than  anything  that  could  be  inflicted  by 
direct  by-law  provision. 

§  230.     Amendments 

The  usual  by-law  provisions  on  this  subject  require  ma- 
jority action  of  the  stockholders  for  amendment  of  the 
by-laws.  This  conforms  to  the  provisions  of  the  common  law. 
Where  greater  stability  is  desirable  on  account  of  special  pro- 
visions incorporated  in  the  by-laws,  or  generally  as  a  protec- 
tion to  minority  interests,  it  is  sometimes  provided  that  two- 
thirds  in  interest,  or  even  a  larger  proportion  of  the  stock- 
holders, must  vote  in  favor  of  any  amendment  before  it  is 
effected. 

Such  provisions,  merely  made  part  of  the  by-laws,  unless 
reinforced  in  some  way  are  of  but  little  avail.  The  majority 
have  the  right  to  amend  and  repeal  the  by-laws,  and  it  cannot 
be  taken  from  them  by  a  mere  unsupported  by-law  inhibition.^ 

Such  a  provision,  to  be  effective,  must  either  be  incor- 
porated in  the  charter,  or,  if  in  the  by-laws  only,  must  be  so 
established  and  confirmed  by  vested  rights  accrued  under  it 
as  to  have  become  in  effect  a  contract  between  the  corporation 
and  the  stockholders.  When  this  is  done  the  by-law  becomes 
unchangeable,  except  in  accordance  with  its  own  provisions. 
As  stated  in  a  noted  New  York  case:^ 

A  private  corporation  cannot  repeal  a  by-law  so  as  to 
impair  rights  which  have  been  given  and  become  vested  by 

1  Smith  V.  Nelson,  18  Vt.  511  (1846). 

2  The  New  York  Court  of  Appeals  in  Kent  v.   Quicksilver  Mining  Co.,  78  N.  Y. 
15.9  (1879). 


238 


THE   BY-LAWS 


virtue  of  the  by-law ;  and  this  although  the  power  is  reserved 
by  its  charter  to  alter,  amend  or  repeal  its  by-laws. 

This  is  stated  yet  more  strongly  in  a  New  Jersey  case,^ 
a  case  where  stock  had  been  sold  on  the  strength  of  the 
safety  afforded  by  special  charter  and  by-law  provision,  where 
the  court  states  the  settled  law  to  be: 

*'That  the  certificate  of  organization  and  the  by-laws  con- 
temporaneously adopted,  constitute  a  contract  between  the 
stockholders,  and  that  it  is  not  competent  for  the  legislature 
to  authorize  either  to  be  changed  without  the  consent  of  all 
the  stockholders,  except  it  be  done  in  the  mode  provided  by 
the  by-laws  themselves."* 

It  is  worthy  of  note  that  it  has  been  decided  in  Pennsyl- 
vania that  the  by-laws  cannot  be  amended  by  a  majority  of  the 
stockholders  at  an  annual  meeting  in  any  important  particu- 
lar, such  as  an  increase  of  directors,  unless  the  notice  of  that 
meeting  informed  all  the  stockholders  that  such  action  was  con- 
templated.^ 


'  Loewenthal  v.  Rubber  Reclaiming  Co.,  ^2  N.  J.  Eq.  440,  441  (1894). 

*  See  also  Mills  v.  Cent.  R.  R.   Co.,  41   I^.  J.  Eq.  i  (1886). 

•  Bagley  v.  Reno,  etc.,  Co.,  201  Pa.  St.  78  (190-). 


Part  VII — Organization  Meetings 


CHAPTER   XXXIII 

FIRST    MEETING    OF   STOCKHOLDERS 

§  231.     General 

In  the  great  majority  of  the  states,  procedure  for  the 
organization  of  a  corporation  is  uniform  as  to  the  main  fea- 
tures. First,  the  charter  is  prepared  and  is  executed  by  the 
incorporators ;  next,  this  duly  executed  charter  is  filed  with  the 
officials  prescribed  by  statute;  then  the  meeting  of  incorpo- 
rators is  held,  by-laws  adopted,  directors  elected,  and  such 
other  action  taken  as  may  be  necessary.  The  directors  then 
meet,  elect  the  officers  of  the  corporation,  and  its  organization 
is  complete. 

In  a  few  states,  however,  this  procedure  is  practically  re- 
versed, the  election  of  directors  and  officers  and  adoption  of 
by-laws  preceding  the  filing  of  the  charter.  In  other  words, 
the  by-laws  are  adopted  and  directors  and  officers  elected 
before  the  corporation  has  any  legal  existence.  The  arrange- 
ment seems  somewhat  illogical,  but  is  prescribed  by  the  stat- 
utes of  certain  states  and  in  those  states  must  be  followed. 
It  merely  amounts  to  a  preliminary  determination  of  these 
details,  of  no  force  unless  the  charter  application  is  allowed, 
but  then  becoming  automatically  effective  arid  binding  on  the 
new  corporation.  This  variation  of  the  usual  procedure  is 
found  in  Maine,  Massachusetts,  and  some  other  states.  In 
these  states  the  proceedings  outlined  in  the  present  and  foUow- 

239 


240 


ORGANIZATION    MEETINGS 


ing  chapters  must  be  modified  to  meet  the  statute  require- 
ments. 

Under  the  customary  procedure,  the  duly  prepared  char- 
ter application,  accompanied  by  the  proper  fees,  is  submitted 
to  the  official  designated  by  the  statutes,  for  approval  and 
filing.  After  the  application  has  been  approved  and  filed  and 
this  has  been  notified  to  the  incorporators,  these  latter  are 
authorized  to  assemble  and  perfect  the  organization  of  the 
new  corporation. 

The  incorporators  or  their  proxies  are  the  only  persons 
entitled  to  act  at  this  time.  Their  power  to  call  the  first  meet- 
ing and  to  act  thereat  for  the  corporation  is  derived  from  the 
recognition  and  express  authorization  given  them  by  statute. 
If  their  subscriptions  are  set  forth  in  the  charter  itself,  each 
incorporator  votes  at  this  first  meeting  in  accordance  with  such 
stock  subscription,  one  vote  for  each  share  subscribed  for.  In 
those  states  where  the  first  meeting  is  held  before  the  charter 
is  granted,  each  incorporator  is  usually  entitled  to  but  one  vote 
in  the  organization  meeting. 

There  may  be  numerous  subscribers  to  the  stock  of  the 
new  corporation  who  are  not  named  in  the  charter,  but  these 
subscribers  are  not  yet  stockholders  of  the  corporation,  and 
do  not  become  stockholders  and  are  not  entitled  to  any  par- 
ticipation in  its  affairs  until  after  express  acceptance  of  their 
subscriptions  by  the  corporation. 

Unless  there  is  some  good  reason  to  the  contrary,  the  num- 
ber of  incorporators  is  usually  fixed  at  the  minimum  allowed 
by  the  statutes.  This  is  done  purely  as  a  matter  of  con- 
venience and  as  simplifying  the  formalities  preliminary  and 
incident  to  the  first  meeting. 

Where  the  number  of  incorporators  is  small,  the  first 
meeting  is  most  conveniently  assembled  by  means  of  a  writ- 
ten call  and  waiver  of  notice  (See  Form  31)  which  must  be 
signed  by  all  the  incorporators.     This  call  and  waiver  fixes 


FIRST    MEETING    OF    STOCKHOLDERS  24I 

the  time  and  place  of  meeting,  and  should  also  specify  the 
business  to  be  transacted  thereat,  though,  by  reason  of  all  the 
interested  parties  signing,  so  much  particularity  is  not  neces- 
sary as  in  the  call  for  the  usual  special  meeting.  A  blanket 
phrase  consenting  to  the  transaction  of  any  and  all  business 
brought  before  the  meeting  is  in  this  case  allowable  and 
authoritative.  Such  a  call  and  waiver,  to  be  effective,  must 
be  signed  by  every  incorporator  at  or  before  the  time  of 
meeting.  If  it  is  not,  a  meeting  held  pursuant  thereto  is  not 
legally  called  and  its  proceedings  are  liable  to  be  set  aside.^ 
The  call  and  waiver  need  not  be  issued  or  signed  at  any  defi- 
nite time  before  the  meeting,  as  it  is  a  waiver  of  all  statutory 
requirements  of  notice.  A  meeting  assembled  by  means  of  a 
duly  signed  call  and  waiver  and  properly  conducted  is  legal  in 
any  state  of  the  Union.  Often  the  call  is  signed  at  the  meet- 
ing as  the  first  order  of  business. 

Where  for  any  reason  the  call  and  waiver  of  notice  cannot 
be  used,  any  form  or  method  of  procedure  prescribed  by  the 
statutes  for  the  assembling  of  the  first  meeting  should  be  fol- 
lowed to  the  letter.  If  no  form  is  prescribed  by  the  statutes 
it  will  be  necessary  for  a  majority  of  the  incorporators  to 
unite  in  a  call  for  the  first  meeting.  (See  Form  31.)  This 
call  must  fix  the  time,  place,  and  business  to  be  transacted  at 
the  meeting,  and  must  be  served  on  the  incorporators  who 
have  not  signed  the  call.  Any  convenient  place  of  meeting 
may  be  selected,  the  time  of  notice  must  be  sufficient  to 
permit  all  the  incorporators  to  be  conveniently  present,  and 
the  business  to  be  transacted  should  be  set  forth  in  detail.  The 
meeting  is  practically  nothing  more  than  a  special  meeting  of 
the  stockholders,  and,  in  the  absence  of  statutory  prescription, 
its  notice  should  follow  the  general  rules  in  regard  to  notice 
for  special  meetings.     (See  §§  183,  184.) 


*  Braintree,  etc.,  Co.  v.  Braintree,  146  Mass.  4182  (1888) ;  Holcombe  et  at.  v.  Trenton 
White  City  Co.,  Sa  Atl.  (N.  J.)  618  (1912). 


242 


ORGANIZATION   MEETINGS 


§  232.     Preparation  of  Minutes 

The  first  meeting  of  stockholders,  and  usually  the  first 
meeting  of  the  directors  as  well,  is  of  the  cut-and-dried  order. 
In  most  cases  the  incorporation  is  undertaken  for  a  specific 
purpose  and  usually  by  certain  people,  who  have  already  set- 
tled among  themselves  just  how  the  corporation  is  to  be  or- 
ganized in  all  main  details.  The  organization  meetings  are 
merely  a  formal  execution  of  these  prearranged  plans.  It  is 
therefore  customary  to  have  the  minutes  of  these  first  meet- 
ings written  out  in  advance  and  often  with  much  particular- 
ity. (See  Form  30.)  The  advantages  of  the  plan  are  found 
in  the  orderly  procedure  thereby  outlined,  the  better  presenta- 
tion of  the  matters  to  be  considered,  and  the  inclusion  of  all 
matters  that  ought  to  be  considered.  If  anything  occurs  at  or 
during  the  time  of  the  meeting  to  modify  the  minutes  as  al- 
ready written,  the  necessary  changes  are  quickly  made  on  the 
prepared  draft  by  erasure  or  interlineation,  and  are  properly 
incorporated  in  the  minutes  when  these  are  entered  in  the 
minute  book. 

§  233.    Conduct  of  First  Meetings 

The  manner  of  conducting  the  first  meetings  varies  widely 
with  the  conditions.  In  certain  cases,  where  everything  is  set- 
tled in  advance  and  is  to  be  kept  in  the  precise  shape  deter- 
mined upon,  the  entire  minutes  are  put  in  final  shape  before 
the  time  of  meeting.  Then  the  attorney,  or  other  party  hav- 
ing the  incorporation  in  hand,  after  due  assembling  of  the 
incorporators,  reads  to  them  these  cut-and-dried  minutes  as 
the  proceedings  of  the  meeting.  With  the  assent  of  those 
present,  or  in  the  absence  of  express  objection,  the  minutes  so 
presented  are  declared  to  be  the  minutes  of  the  meeting,  which 
is  thereupon  adjourned.  The  minutes  are  then  transcribed 
in  the  minute  book,  are  signed  by  the  parties  respectively  men- 
tioned in  the  minutes  as  the  presiding  officer  and  secretary, 


FIRST   MEETING   OF   STOCKHOLDERS 


243 


and  the  matter  is  closed.  The  directors'  meeting  is  conducted 
in  the  same  perfunctory  manner  and  with  the  same  precision 
of  result. 

This  method  though  informal  and  irregular  cannot  be  said 
to  be  illegal.  The  presence  of  all  the  parties  in  interest  and 
their  assent  and  active  participation,  acts  to  estop  them  from 
objecting  to  the  proceedings  and  no  one  else  would  have  the 
right  to  object. 

It  is  needless  to  say  that  when  this  method  is  employed 
the  incorporators  are  frequently  dummies,  who,  after  the  com- 
pletion of  the  organization,  step  aside  and  make  way  for  the 
real  parties  in  interest. 

When  the  exact  proceedings  of  the  minutes  are  to  be 
carried  out,  but  the  attorney  in  charge  does  not  wish  it  to  be 
so  purely  a  matter  of  form,  the  minutes  will  be  read  but  the 
parties  named  therein  will  go  through  the  indicated  motions. 
Thus,  if  the  minutes  state  that  the  charter  is  presented  by  the 
president,  or  chairman,  a  copy  of  the  charter  will  be  handed 
the  party  named  in  the  minutes  as  the  presiding  officer  and 
the  minutes  verified  by  its  due  presentation  to  the  meeting. 
Likewise  the  parties  named  as  making  and  seconding  motions 
will  be  asked  if  they  make  and  second  such  motions,  their 
ready  assent  usually  verifying  the  predictions  of  the  minutes 
to  a  nicety.  Also,  as  each  motion  is  reached  in  the  reading, 
the  meeting  will  be  asked  if  it  favors  such  motion,  the  assent 
of  the  meeting  usually  being  readily  obtained.  Such  a  meet- 
ing is  less  of  a  legal  fiction  than  the  meeting  conducted  en- 
tirely by  the  reading  of  the  minutes,  and  is  to  be  preferred. 

Where  the  real  parties  in  interest  participate  in  the  first 
meetings,  the  proceedings  are  not  usually  of  such  a  perfunc- 
tory nature.  The  minutes  then  serve  more  as  a  detailed  order 
of  business  and  are  varied  as  the  needs  of  the  occasion  seem 
to  indicate.  The  presiding  officer  really  presides,  the  secre- 
tary performs  his  functions,  motions  are  made,  the  necessary 


244 


ORGANIZATION    MEETINGS 


elections  actually  take  place,  discussions  are  in  order  if  the 
necessity  arises,  and,  in  short,  the  assemblage  is  a  meeting 
intelligently  acting,  and  not  a  collection  of  dummies,  useful 
mainly  as  pegs  upon  which  to  hang  the  prescribed  proceedings. 
In  the  comments  which  follow,  it  has  been  taken  for 
granted  that  the  actions  of  the  meeting  are  to  be  really  taken. 

§  234.     Opening  the  First  Meeting  of  Stockholders 

At  the  duly  appointed  time  and  place,  the  incorporators 
or  a  majority  of  them,  having  assembled,  some  one  of  those 
present  calls  the  meeting  to  order,  and,  in  the  absence  of  ob- 
jection thereto,  calls  on  some  other  incorporator  present  to  take 
the  chair.  If  there  is  any  objection  to  the  appointee,  or  to 
the  selection  of  a  chairman  by  appointment,  the  party  calling 
the  meeting  to  order  should  let  the  matter  be  decided  by  vote. 
The  chairman,  as  soon  as  his  appointment  or  election  is  an- 
nounced, takes  charge  of  the  meeting  and,  if  there  is  no 
objection  thereto,  appoints  some  one  present  to  act  as  secre- 
tary. If  there  should  be  any  objection  to  the  chairman's  ap- 
pointment of  a  secretary,  it  will  be  necessary  to  settle  the  mat- 
ter by  vote.  The  secretary,  as  soon  as  appointed  or  elected, 
will  note  the  names  of  those  present  and  ask  for  the  proxy  of 
any  incorporators  not  present  in  person.  It  is  always  desirable 
to  have  all  the  incorporators  represented  at  this  first  meeting 
in  person  or  by  proxy,  though  a  majority  in  interest  can  legally 
act  if  properly  assembled. 

The  next  step  is  to  show  that  the  meeting  has  been 
properly  called.  This  is  a  matter  for  the  secretary.  If  it  has 
been  assembled  by  call  and  waiver  signed  by  all  the  incorpo- 
rators, this  call  and  waiver  should  be  produced,  be  given  to 
the  secretary — if  not  already  in  his  possession — and  be 
ordered  entered  on  the  minutes  of  the  meeting.  If  called  by 
publication,  copies  of  the  newspapers  in  which  the  notice  ap- 
peared, or  the  affidavit  of  the  printer,  are  adequate  evidence. 


FIRST   MEETING   OF   STOCKHOLDERS  245 

If  called  by  notice  served  personally  or  by  mail,  a  copy  of  the 
notice  should  be  presented,  accompanied  by  a  certificate  of  the 
party  by  whom  it  was  served  that  such  service  was  duly 
effected.  If  the  meeting  assembled  in  any  other  way,  the  pro- 
cedure and  the  evidence  that  it  was  properly  carried  out  should 
be  laid  before  the  meeting  and  should  appear  in  the  minutes. 
The  legality  of  the  meeting  should  be  shown  by  its  record. 

§  235.     Reception  of  Charter 

The  chairman  or  secretary  should  now  produce  a  copy  of 
the  certificate  of  incorporation,  and  report  the  fact  and  date 
of  its  allowance,  its  filing  in  the  office  or  offices  required  by 
the  statutes,  and  the  payment  of  the  required  fees.  It  is 
not  essential  that  this  copy  of  the  charter  be  certified  by  the 
Secretary  of  State,  though  such  certified  copy  is  customarily 
procured  and  is  generally  more  satisfactory  to  the  interested 
parties  than  an  uncertified  copy. 

When  the  charter  is  presented  a  motion  is  in  order  that 
the  certificate  of  incorporation  as  presented  be  accepted  or 
received  and  spread  upon  the  minutes  as  a  part  of  the  record 
of  the  meeting.  The  charter  is  entered  preferably  on  the  first 
pages  of  the  minute  book,  followed  by  the  by-laws,  with  the 
other  instruments  that  are  made  part  of  the  record  follow- 
ing the  minutes  proper,  each  beginning  at  the  head  of  a  page. 
So  arranged,  these  instruments  are  much  more  easily  found 
and  referred  to  than  if  incorporated  and  buried  in  the  body 
of  the  minutes.  Also  the  minutes  themselves  are  clearer  and 
more  intelligible  if  not  broken  up  by  the  interjection  of  the 
lengthy  instruments  ordered  spread  upon  the  minutes.  The 
legal  effect  of  the  entry  of  these  instruments  in  the  way  indi- 
cated is  exactly  the  same  as  if  they  appeared  in  the  context. 
The  minutes  should,  of  course,  note  in  the  proper  place  the 
action  on  these  instruments,  and  refer  to  the  pages  of  the 
minute  book  on  which  they  are  entered. 


246  ORGANIZATION   MEETINGS 

§  236.    Adoption  of  By-Laws 

The  by-laws  are  usually  prepared  in  advance  of  the  first 
meeting  and  have  been  fully  considered  by  those  interested. 
(  See  §  1 73. )  At  the  time  of  the  meeting,  they  are  presented, 
read  article  by  article  by  the  secretary  or  by  such  other  per- 
son present  as  may  be  designated  by  the  presiding  officer, 
and  adopted  as  a  whole.  At  times  each  article  will  be  adopted 
as  read,  followed  by  the  adoption  of  the  by-laws  as  a  whole, 
though  this  is  not  a  necessary  formality. 

If  serious  objection  is  offered  to  any  of  the  by-law  pro- 
visions, such  objection  will  be  taken  under  consideration  by 
the  meeting  and  any  proposed  modifications  settled  by  formal 
action.  As  the  time  at  this  first  meeting  is,  however,  usually 
fully  occupied  with  routine  procedure,  such  matters  cannot  be 
given  the  consideration  they  deserve  and  any  objections  or 
suggestions  in  regard  to  the  by-laws  should  be  discussed,  and, 
if  possible,  settled  before  the  meeting. 

Where  the  by-laws  have  been  fully  considered  by  the  in- 
terested parties  in  advance  of  the  meeting  and  all  are  familiar 
with  their  provisions,  the  reading  of  the  by-laws  may,  either 
by  unanimous  consent,  or  by  formal  motion,  be  dispensed 
with  and  the  by-laws  adopted  as  presented  and  as  a  whole. 
The  reading  of  the  by-laws  before  adoption  is,  however,  the 
safer  plan,  preventing  disagreement  later  as  to  just  what 
was  adopted. 

§  237.     Election  of  Directors 

In  most  of  the  states  the  election  of  directors  properly 
follows  the  adoption  of  the  by-laws,  such  election  being  the 
only  method  by  which  the  directors  may  be  properly  designated 
and  empowered.  In  New  York  and  in  some  other  states, 
however,  the  directors  for  the  first  corporate  year  are  named 
in  the  charter.  In  New  York  these  directors  have  certain 
powers  as  to  adoption  of  by-laws.    In  such  case  no  action  in 


FIRST   MEETING   OF   STOCKHOLDERS  247 

regard  to  the  directors  is  necessary  at  the  first  stockholders' 
meeting,  and,  indeed,  the  first  meeting  loses  much  of  its  im- 
portance, as  the  board  is  already  in  existence  with  full  power 
to  make  by-laws  and  to  take  up  and  manage  the  affairs  of  the 
corporation.  A  prompt  first  meeting  of  stockholders  is,  how- 
ever, still  advisable,  as  otherwise  the  board  must  adopt  by-laws 
of  more  or  less  completeness  and  may  be  forced  to  take  other 
action  which  is  better  taken  by  the  stockholders. 

Where  directors  are  to  be  elected  at  the  incorporators' 
meeting,  any  statutory  directions  must  be  followed  exactly 
and  the  minutes  should  show  in  detail  that  this  has  been  done. 
In  the  absence  of  statutory  provisions,  an  election  by  ballot, 
conducted  by  tellers  appointed  by  the  presiding  officer,  is  legal 
and  proper.  In  such  case  the  meeting  is  the  judge  of  the 
qualifications  of  voters,  and  each  incorporator  or  other  par- 
ticipant votes  according  to  the  number  of  shares  of  stock  sub- 
scribed for  by  him.  If  an  agreement  exists  as  to  the  parties 
to  be  elected  as  directors,  these  parties  might  be  nominated  by 
the  meeting,  and  the  secretary  by  motion  be  instructed  to  cast 
the  vote  of  the  meeting  for  the  parties  so  nominated. 

§  238.     Exchange  of  Stock  for  Property 

The  board  of  directors  is  the  proper  and  final  authority  to 
conclude  an  exchange  of  stock  for  property.  Where,  how- 
ever, as  is  often  the  case,  a  large  proportion  or  possibly  all 
the  stock  of  the  corporation  is  to  be  issued  in  payment  for  some 
particular  property,  it  is  customary  and  advisable  to  have  the 
proposed  purchase  sanctioned  and  authorized  by  express  action 
of  the  stockholders.  Such  action  if  unanimous  commits  all 
the  stockholders  to  the  purchase,  and  estops  the  participants 
from  later  objection  to  the  transaction.  The  incorporators 
also  usually  specifically  approve  the  price  at  which  the  prop- 
erty is  taken  over.     This  is  a  desirable  precaution.^ 

•  McBryan  v.  Elevator  Co.,  13a  Mich,  in  (1902)- 


248  ORGANIZATION    MEETINGS 

The  proposal  for  exchange  of  stock  for  property  is 
usually  presented  to  the  meeting,  read,  discussed  if  desired, 
and  then  a  resolution  passed  approving  the  proposed  purchase, 
referring  it  to  the  directors  and  instructing  them  to  con- 
summate the  same. 

§  239.     Other  Business 

Usually  there  will  be  other  business  to  come  before  the 
stockholders  at  this  first  meeting,  depending  upon  the  condi- 
tions surrounding  the  particular  corporation.  In  some  states, 
specific  action  is  required  of  the  stockholder^  by  the  statutes. 
If  there  is  any  action  to  be  taken  by  the  directors  in  which 
there  is  doubt  of  their  power,  or  in  which  some  advantage  is 
to  be  gained  by  an  authorization  from  the  stockholders,  the 
necessary  action  should  be  taken  at  this  time.  Beyond  this  it 
is  not  advisable  for  the  stockholders  to  go.  All  matters  of 
general  management  are  in  the  hands  of  the  board,  and  any 
uncalled-for  action  in  regard  thereto  on  the  part  of  the  stock- 
holders can  have  no  advantageous  results  and  may  embarrass 
the  proper  action  of  that  body. 


CHAPTER   XXXIV 

FIRST  MEETING  OF  DIRECTORS 

§  240.     Calling  the  Meeting 

In  the  majority  of  the  states,  the  directors  of  a  new 
corporation  are  elected  at  the  first  meeting  of  stockholders, 
and,  of  necessity,  the  first  board  meeting  is  held  subsequent 
thereto.  Even  in  those  states  where  by  charter  appoint- 
ment of  the  board  that  body  might  meet  in  advance  of  the 
first  meeting  of  stockholders,  it  is  the  general  practice  for 
the  meeting  of  stockholders  to  come  first. 

At  their  first  meeting  the  stockholders  usually  adopt 
by-laws.  The  board  in  its  first  meeting  has  therefore  the 
guidance  of  these  by-laws  so  far  as  they  apply.  As  the  first 
meeting  of  the  board  is  not  a  regular  meeting,  it  is  governed 
by  the  by-law  provisions  relating  to  special  meetings,  except 
as  variations  are  made  necessary  by  the  unorganized  con- 
dition of  the  board  at  this  time. 

No  secretary  having  as  yet  been  elected,  the  meeting 
cannot  be  called  or  assembled  as  it  otherwise  might,  but 
must  be  assembled  by  a  call  signed  by  a  majority  of  the 
members  of  the  board,  such  call  being  in  its  general  form 
similar  to  the  usual  call  for  special  meetings  and  complying 
in  every  way  with  its  requisites  (see  Form  40)  ;  or  otherwise, 
and  as  is  usually  done,  the  meeting  may  be  assembled  by  a 
written  call  and  waiver  of  notice  signed  by  every  member  of 
the  board  at  or  before  the  time  of  the  meeting  (see  Form  36). 
Signatures  affixed  after  the  time  of  the  meeting  have  been 
held  non-effective.^ 


»  Holcombe  et  al.  v.  Trenton  White  City  Co.,  83  Atl.  (N.  J.)  6i8  (1912). 

249 


250  ORGANIZATION    MEETINGS 

The  call,  or  call  and  waiver,  as  the  case  may  be,  should 
specify  the  time  and  the  place  of  meeting,  and  give  in  detail 
the  various  matters  to  be  considered  and  acted  upon.  If  the 
stockholders  have  selected  any  office  or  definite  headquarters 
for  the  new  corporation,  the  meeting  of  the  directors  will 
naturally  be  called  for  that  place;  if  not,  any  convenient  place 
is  proper.  Often  the  office  of  its  attorney  is  chosen.  The 
most  important  matters  for  consideration  at  this  meeting  are 
the  election  of  officers,  the  issuance  of  stock  for  property — 
where  this  is  to  be  done — and  the  authorization  of  any  pro- 
ceedings necessary  to  the  commencement  of  business.  A 
blanket  provision  permitting  the  transaction  of  any  and  all 
business  pertaining  to  the  affairs  of  the  corporation  should  be 
included  in  the  call  and  waiver.  Signed  by  the  entire  member- 
ship of  the  board  this  provision  is  effectual  and  permits  action 
on  any  corporate  matters  that  may  come  up  for  consideration. 
At  times  this  latitude  of  action  is  of  considerable  advantage. 

§  241.     Minutes 

As  in  the  case  of  the  stockholders*  first  meeting,  the  pro- 
ceedings of  the  first  meeting  of  directors  may  usually  be  antici- 
pated and  minutes  be  prepared  in  advance  with  considerable 
accuracy.  Occasionally  in  such  case  the  minutes  are  pre- 
pared in  permanent  form  and  the  proceedings  conducted  in 
accordance  by  a  mere  reading  of  these  minutes — their  adop- 
tion as  the  minutes  of  the  meeting  being  signified  by  silent 
acquiescence,  by  express  assent,  or  by  a  more  particularized 
assent  on  each  important  point  as  the  reading  progresses. 
Usually,  however,  the  prepared  minutes  are  used  more  as 
memoranda,  the  meeting  going  through  the  motions  at  least 
of  transacting  the  outlined  business.     (See  Form  35.) 

It  is  hardly  necessary  to  say,  that  "cut  and  dried" 
minutes  should  not  be  prepared  or  used  where  there  is  any 
probability  of  a  difference  of  opinion  in  the  board.    Courtesy 


FIRST    MEETING    OF   DIRECTORS 


251 


would  forbid,  even  if  there  were  a  decided  majority  in  favor 
of  the  outHned  action.  Also,  speaking  generally,  it  would 
be  neither  politic  nor  advisable  to  ignore  so  openly  the  con- 
sideration and  deliberation  which  should  characterize  board 
action  in  case  of  disagreement. 

§  242.     Opening  the  First  Meeting  of  Directors 

When  the  board  assembles  in  its  first  meeting  it  is  unor- 
ganized and  must  therefore  be  called  to  order  by  some  one 
of  its  members,  who,  on  his  own  volition  or  at  the  request 
of  other  members,  takes  the  initiative.  This  member  merely 
calls  the  meeting  to  order,  and,  in  the  absence  of  objection, 
names  a  temporary  chairman  or  presides  until  a  temporary 
chairman  is  appointed  or  elected  by  the  meeting.  This  chair- 
man then  takes  charge  of  the  meeting,  a  temporary  secretary 
is  at  once  appointed  or  elected,  and  the  temporary  organiza- 
tion of  the  board  is  complete. 

The  call,  or  call  and  waiver,  or  other  authorization  under 
which  the  board  has  assembled,  should  then  be  presented, 
and,  if  it  appears  that  the  meeting  has  been  duly  assembled, 
the  evidence  thereof  should  be  ordered  entered  on  the  min- 
utes. In  the  absence  of  objection  this  might  be  so  ordered  by 
the  presiding  officer,  otherwise  by  formal  action.  As  the 
meeting  is  a  special  meeting  it  is  important  that  it  shall  have 
been  properly  called  and  that  due  record  be  made  of  this  fact. 

A  roll  call,  or  its  equivalent,  the  recording  of  those  present 

by  the  secretary,  completes  the  opening  formalities  and  the 

meeting  is  ready  for  business. 

"•I 

§  243.     Election  of  Officers  ^ 

If,  as  is  almost  invariably  the  case,  the  officers  of  the  cor- 
poration are  to  be  elected  by  the  board,  their  election  is  the 
first  business  before  the  meeting.  The  by-laws  already 
adopted  by  the  stockholders  usually  designate  the  officers  to 


252  ORGANIZATION    MEETINGS 

be  elected  and  the  manner  of  their  election,  and  these  require- 
ments should  be  strictly  followed.  Generally  the  election  is 
by  ballot.  Candidates  for  the  various  offices  might  be  sev- 
erally nominated  with  due  second  thereto,  but  when,  as  is  usu- 
ally the  case,  all  these  candidates  have  been  agreed  upon  in 
advance,  formal  nominations  are  dispensed  with  and  the  de- 
tails of  election  taken  up  at  once.  Where  all  are  agreed,  a 
motion  is  frequently  passed  instructing  the  secretary  to  cast 
the  single  ballot  of  the  meeting  for  the  recited  list  of  officers. 
This  is  proper  and,  at  times,  convenient. 

If  the  election  is  to  be  carried  out  in  detail,  the  presiding 
officer  will,  in  the  absence  of  objection,  appoint  tellers.  The 
members  of  the  board  then  prepare  their  respective  ballots 
and  the  tellers  collect  and  count  these  ballots  and  announce 
the  results.  Each  officer  may  be  balloted  for  separately,  or, 
as  is  usually  the  case,  one  ballot  be  made  to  serve  for  all  the 
officers. 

Immediately  after  the  election  the  newly  elected  president 
and  secretary,  if  present,  take  charge  of  the  meeting  and 
assume  their  respective  official  duties.  If,  however,  these 
officials-elect  are  absent,  or  if  anything  prevents  their  imme- 
diate assumption  of  their  duties,  the  temporary  officers  will 
continue  to  act  until  the  close  of  the  meeting,  unless  the  per- 
manent officers  sooner  take  charge.  If,  as  in  New  Jersey, 
the  secretary  is  required  to  be  sworn,  he  should  comply  with 
this  requirement  before  undertaking  to  act  in  his  official 
capacity,  though  his  failure  so  to  do  would  not  vitiate  his 
records,  nor  affect  in  any  way  the  legality  of  the  meeting. 

§  244.     Adoption  of  Stock  Certificate 

The  stockholders  may,  if  they  so  desire,  either  by  reso- 
lution or  by-law  provision,  adopt  a  form  of  stock  certificate. 
The  matter  is  one,  however,  that  is  usually  and  better  left  to 
the  discretion  of  the  board.    Frequently  temporary  certificates 


FIRST   MEETING   OF   DIRECTORS 


253 


are  adopted,  to  be  replaced  later  by  more  elaborate  perma- 
nent certificates.  Changes  of  conditions  may  occur  necessitat- 
ing change  in  the  certificate  originally  adopted.  Other  con- 
tingencies affecting  its  form  not  infrequently  arise.  For  these 
and  other  reasons  the  matter  is  one  best  handled  by  the  board. 

Frequently  a  form  of  stock  certificate  is  selected  and 
possibly  printed  or  engraved  before  the  time  of  the  first  board 
meeting.  Even  if  this  be  so,  the  selected  form  should  be 
formally  adopted,  and  either  the  secretary  should  be  author- 
ized and  instructed  to  procure  the  necessary  books  of  stock 
certificates,  or,  if  the  books  have  already  been  procured,  such 
action  should  be  ratified  and  the  books  as  presented  be  ac- 
cepted. The  resolution  by  which  this  is  effected  should  also 
authorize  the  secretary  to  provide  a  seal,  minute  book  and  such 
other  corporate  books  and  stationery  as  may  be  required. 
(See  Form  35.) 

The  form  of  seal  is  customarily  determined  in  the  by- 
laws which  have  already  been  adopted  by  the  stockholders. 
If  this  is  not  the  case  the  form  of  seal  should  be  selected  and 
adopted  by  the  directors. 

§  245.     Acceptance  of  Subscriptions 

Subscriptions  made  by  the  incorporators  of  a  new  com- 
pany need  no  formal  acceptance.  The  mere  fact  of  their 
having  executed  the  charter,  in  which  their  subscriptions 
usually  appear,  and  of  having  participated  in  the  organiza- 
tion meetings,  obviates  the  necessity  of  acceptance.  If  there 
are  other  subscribers  to  the  stock  of  the  new  company,  these 
other  subscriptions  require  formal  acceptance.  This  is  accom- 
plished by  resolution  of  the  board  of  directors.  The  accept- 
ance of  these  subscriptions  completes  and  makes  binding  the 
contract  between  the  corporation  and  those  who  have  offered 
to  take  its  stock.  Neither  party  can  then  recede,  and  the  ac- 
cepted subscribers  at  once  become  stockholders  of  the  corpo- 


254  ORGANIZATION    MEETINGS 

ration  entitled  to  all  the  rights  of  stockholders.  The  issue 
of  certificates  to  these  subscribers  does  not  usually  take  place 
until  their  subscriptions  are  fully  paid,  but  this  does  not  affect 
their  rights  as  stockholders  in  any  way,  the  certificate  being 
merely  a  convenient  method  of  evidencing  their  status.  If 
"accepted"  subscribers  do  not  fulfill  the  conditions  of  sub- 
scription, their  stock  may  be  forfeited  when  statutory  author- 
ity for  such  procedure  exists,  but  until  such  forfeiture  takes 
place  their  rights  are  in  full  existence.^ 

The  acceptance  of  subscriptions  is  followed  by  such  action 
in  regard  to  the  payment  thereof  as  may  be  necessary.  If 
part  or  all  of  the  subscription  price  of  the  stock  were  due 
on  acceptance,  the  treasurer  of  the  company  would  be  em- 
powered to  collect  the  amounts  due.  If,  as  in  New  Jersey, 
thirty  days*  call  must  be  made — unless  waived  by  the  subscrib- 
ers— ^before  any  part  of  the  subscription  price  of  stock  can  be 
collected,  the  board  should  either  instruct  the  treasurer  to 
issue  such  call,  or,  as  is  usually  done,  secure  a  waiver  of  this 
condition  by  the  subscribers  and  take  immediate  steps  for  the 
collection  of  the  amounts  then  due. 

If  the  corporation  has  been  organized  with  the  minimum 
amount  of  subscriptions  permitted  by  the  statutes  and  addi- 
tional subscriptions  are  necessary  or  desired,  the  action  taken 
will  be  governed  entirely  by  the  conditions  of  the  particular 
corporation.  In  most  cases  the  proper  officers  of  the  corpo- 
ration would  be  instructed  to  offer  for  sale  or  subscription 
such  portion  of  the  capital  stock  as  was  to  be  sold. 

§246.    Exchange  of  Stock  for  Property 

If,  as  is  almost  invariably  the  case  with  business  corpora- 
tions of  the  present  day,  all  or  a  portion  of  the  corporate 
stock  is  to  be  issued  in  exchange  for  property,  the  matter  is 
usually  brought  before  the  first  meeting  of  the  board  by  the 


'i  Cook  on  Corp.,  §§52,  7?;  2  Id.,  §540;  but  see  Bole  et  oil.  v,  Fulton  et  al., 
Atl.  (Pa.)  947  (1912). 


FIRST    MEETING    OF    DIRECTORS  255 

submission  of  a  formal  written  proposition  for  the  exchange, 
accompanied  by  a  resolution  of  the  stockholders  approving 
the  exchange  and  instructing  the  directors  to  accept  the  prop- 
osition. These  matters  are  presented  with  proper  explanations 
by  the  presiding  officer,  or  may  with  entire  propriety  come 
through  the  secretary.  Usually  the  proposition  is  ordered 
received  and  spread  in  full  upon  the  minutes  of  the  directors' 
meeting.  If  it  has  already  been  entered  in  full  in  the  stock- 
holders* minutes,  the  entry  in  the  directors*  minutes  would 
not  be  necessary,  but  preferably  the  proposition  should  be 
reserved  to  appear  in  the  directors*  minutes  in  connection  with 
the  final  action  taken  thereon. 

Usually  such  a  proposal  calls  for  little  discussion  as  the 
matter  has  already  been  fully  considered.  The  presentation 
and  formal  disposal  of  the  documents  in  the  case  is  there- 
fore generally  followed  by  a  formal  resolution  of  acceptance. 
This  resolution  should  briefly  recite  the  conditions,  specifi- 
cally accept  the  proposition,  and  instruct  the  officers  to  take 
the  necessary  steps  to  consummate  the  transaction.  It  should 
also  authorize  the  proper  officers  to  issue  the  stock  consider- 
ation and  deliver  it  against  the  delivery  of  the  duly  assigned 
property  for  which  it  pays. 

§  247.    Treasurer's  Bond ;  Depositary 

In  all  cases  where  a  bond  is  required  of  the  treasurer, 
the  details  of  this  bond  should  be  submitted  to  the  board  and 
be  formally  approved  by  it  before  the  treasurer  assumes  the 
active  duties  of  his  office.  When  the  treasurer  is  agreed  upon 
before  this  first  meeting  of  the  board — as  is  usually  the  case 
— it  will  be  possible  and  entirely  proper  for  him  to  have  the 
form  of  his  bond  and  the  name  or  names  of  his  proposed 
sureties  ready  for  submission  at  the  first  convenient  interval 
in  the  board  proceedings  after  his  election.  The  form  and 
sureties  of  the  bond,  if  approved,  should  be  formally  accepted. 


256 


ORGANIZATION    MEETINGS 


and  the  instrument  after  execution  be  entrusted  to  either  the 
president  or  secretary  for  safe-keeping.  The  treasurer  will 
then  at  once  enter  on  his  duties.  At  times  the  approval  of 
the  treasurer's  bond  is  left  to  the  executive  committee  or  even 
to  the  president. 

The  by-laws  should  already  have  provided  that  the  funds 
of  the  corporation  be  deposited  in  some  bank  or  trust  com- 
pany, or  one  or  more  of  these  institutions  as  may  be  neces- 
sary and  as  may  be  designated  by  the  directors,  and  that  such 
funds  be  drawn  out  only  by  check  signed  usually  by  speci- 
fied officers  of  the  corporation.  It  now  devolves  upon  the 
board  to  designate  the  corporate  depositary.  This  is  done 
by  means  of  a  resolution,  of  which  a  copy  is  furnished  the 
selected  institution  at  the  time  of  opening  the  account.  This 
copy  should  be  certified  by  the  secretary,  and  the  names  of  the 
officers  authorized  to  sign  checks  and  the  form  of  signature 
should  also  be  certified  to  the  bank.  (See  Forms  35,  41.) 
Often  the  banks  have  their  own  special  forms  for  such  resolu- 
tions of  corporate  depositors.*  In  this  case,  the  resolution 
would  conform  to  the  bank's  requirements. 

§248.    Other  Business 

Many  matters  of  lesser  importance  will  be  brought  be- 
fore the  first  meeting  of  directors,  according  to  the  particu- 
lar conditions.  Authority  may  be  needed  to  rent  and  furnish 
suitable  offices  for  the  new  corporation.  In  some  states  pro- 
vision must  be  made  for  a  state  agent  and  office.  Various 
statutory  requirements  must  be  fulfilled.  Certain  certificates 
and  reports  may  need  authorization.  Details  of  the  general 
business  require  consideration.  The  treasurer  should  also 
be  authorized  and  instructed  to  pay  out  of  the  new  corpo- 
ration's funds  the  expenses  of  incorporation,  including  coun- 
sel fees  and  organization  taxes. 

If  the  matters  requiring  attention  cannot  be  all  properly 


FIRST    MEETING    OF    DIRECTORS  257 

considered  at  this  first  session  of  the  board,  adjournment 
should  be  taken  to  the  next  day  or  to  some  other  convenient 
date.  Such  adjourned  meeting  is  considered  as  merely  a  part 
or  a  continuation  of  the  original  meeting,  and  reassembles 
at  the  appointed  time  without  formality  and  completes  its 
work.  If  on  the  other  hand  the  board  adjourned  without  date, 
it  could  only  be  reassembled — prior  to  the  next  regular  meet- 
ing— by  the  methods  prescribed  in  the  by-laws  for  the  calling 
of  special  meetings. 

Matters  requiring  the  attention  of  the  board  are  usually 
so  numerous  in  the  first  days  of  the  corporate  existence  that 
it  is  a  wise  precaution — even  if  not  necessitated  by  business 
actually  on  hand — to  adjourn  the  first  meeting  over  a  few 
days.  Then,  if  necessary,  the  adjourned  meeting  may  be  held. 
If  not  necessary,  the  members  need  not  attend  and  the  meet- 
ing will  lapse,  the  efifect  being  then  exactly  the  same  as  if 
the  board  had  adjourned  without  date  at  the  first  meeting. 


BOOK  III 
CORPORATE  MANAGEMENT 


Part  VIII — Stock  Records  and  Stock  Transfer 


CHAPTER   XXXV 

THE  STOCK  RECORDS 

§  249.     Transfer  on  Books  of  Corporation 

As  a  rule,  the  issue  of  stock  is  evidenced  by  the  issue  of 
stock  certificates,  and  transfers  of  stock  are  effected  by  as- 
signment of  these  certificates.  The  due  possession  of  a  prop- 
erly issued  stock  certificate,  or  of  such  a  stock  certificate  duly 
assigned,  is  therefore  sufficient  evidence  of  the  ownership  of 
stock  for  all  ordinary  business  purposes. 

For  all  corporate  purposes,  however,  stock  certificates  are 
merely  secondary  evidence  of  stock  ownership,  the  stock  books 
of  the  corporation  affording  the  highest  evidence  of  title.^  In 
many  states  this  is  a  matter  of  statutory  regulation ;  elsewhere, 
of  charter  or  by-law  provision,  such  statutory  or  corporate 
regulations  ordinarily  prescribing  that  transfers  of  stock  shall 
be  made  only  upon  the  stock  books  of  the  corporation  and 
that  "stockholders  of  record,"  i.e.,  those  whose  names  appear 
upon  the  stock  books  of  the  corporation,  are  alone  entitled  to 
exercise  the  usual  rights  of  stockholders. 

Thus  it  will  be  seen  that  while  the  duly  assigned  stock 
certificate  is  good  evidence  of  the  ownership  of  stock,  such 
ownership  is  not  effective  for  corporate  purposes  until  the 
transfer  has  been  recorded  upon  the  stock  books  of  the  corpo- 


»  Cleveland,  etc.,   R.   R.   v.   Robbins,  35  O.   St.  483  (1880);  Brisbane  v.  Del.,  etc. 
R.  R.,  94  N.  Y.  204  (1883). 

261 


262    STOCK  RECORDS  AND  STOCK  TRANSFER 

ration.  The  holder  of  such  a  certificate  may  force  the  proper 
entries  upon  the  corporate  books  but  he  cannot  exercise  the 
rights  of  a  stockholder  until  such  record  has  been  made ;  hence 
the  importance  of  a  carefully  kept  stock  book. 

Upon  the  wrongful  refusal  of  the  corporation  to  transfer 
stock,  the  owner  has  three  remedies.  He  may  treat  the  refusal 
to  transfer  as  a  conversion  of  the  shares  in  the  corporation 
and  sue  for  their  value ;  he  may  assert  his  ownership  and  sue 
for  the  dividends ;  or  he  may  commence  an  action^  to  compel 
the  transfer  upon  the  books  of  the  company. 

A  practical  application  of  this  rule  is  found  in  the  usual 
provision  that  the  transfer  books  of  the  corporation  shall  be 
closed  a  specified  number  of  days  before  elections  or  dividend 
days.  This  absolutely  prevents  any  change  of  ownership  for 
corporate  purposes  during  the  closed  period  and  avoids  the 
confusion  that  would  otherwise  exist  when  preparing  for  pay- 
ment of  dividends,  sending  out  notices  of  meetings  and  deter- 
mining who  is  entitled  to  vote  at  elections.  Stock  may  be  sold 
without  restriction  during  this  closed  period,  transfers  being 
evidenced  by  assigned  certificates,  but  the  record  of  these 
transfers  on  the  corporate  books  cannot  be  effected  until  the 
stock  books  are  again  opened. 

If  no  stock  certificates  were  issued,  the  interests  of  the 
stockholders  of  a  corporation  might  still  be  assigned  very 
simply,  either  by  transfer  on  the  books  of  the  corporation  by 
the  parties  in  person  in  the  presence  of  a  corporate  official,  or 
by  the  execution  of  formal  instruments  of  assignment  so  at- 
tested as  to  satisfy  the  corporate  transfer  officer  of  their 
validity.' 

The  books  of  the  corporation  used  in  connection  with  the 
issue  and  transfer  of  stock  are  the  stock  certificate  book,  the 
stock  ledger,  and  the  stock  transfer  book. 

'  Travis  v.  Knox  Terpezone  Co.,  215  N.  Y,  259  (1915)- 

•  May   V.    McQuillan,   129  Mich.  392  (1902) ;   Lipscomb  v.   Condon»  56  W.   Va.  416 
0904)- 


THE    STOCK   RECORDS 


263 


§  250.     Stock  Certificate  Book 

The  stock  certificate  book  consists  of  blank  stock  certifi- 
cates which,  numbered  and  in  serial  order  and  each  with  its 
corresponding  stub,  are  bound  up  in  book  form.  The  board 
of  directors  has  power  to  prescribe  the  form  of  stock  certifi- 
cates and  to  direct  their  issue.  (See  Chapter  LXVI,  "Stock 
Certificates.") 

The  stock  certificate  book  is  usually  prepared  at  the  time 
the  company  is  organized  or  sometimes  even  before,  so  that 
certificates  may  be  issued  as  soon  as  the  corporate  officials 
have  been  authorized  thereto.  In  this  case  the  form  of  stock 
certificate  is  approved  and  the  issue  of  certificates  authorized 
at  the  first  meeting  of  the  board.  On  the  other  hand,  the  issue 
of  permanent  certificates  is  sometimes  deferred  for  a  consider- 
able period  on  account  of  the  time  required  for  their  prepara- 
tion, or  to  temporarily  save  expense,  or  for  some  other  reason. 
Under  such  circumstances,  temporary  receipts  or  certificates 
(Forms  15,  16,  and  17)  are  issued  which  are  exchangeable  for 
the  permanent  certificates  as  soon  as  the  latter  are  ready  for 
delivery. 

When  an  issue  of  stock  is  directed,  the  secretary  fills  out 
and  seals  in  numerical  order  the  proper  certificates.  At  the 
same  time  he  enters  on  the  stub  of  each  certificate  the  name 
of  the  party  to  whom  it  is  to  be  issued,  the  number  of  shares 
represented  by  the  certificate,  the  date  of  issue,  and,  if  it  is 
an  original  issue,  that  fact  is  noted  on  the  stub;  if  a  reissue, 
the  number  of  the  certificate  surrendered  is  entered.  The 
stub  also  usually  includes  a  receipt  to  be  signed  by  the  party 
to  whom  the  certificate  is  issued  and  a  blank  on  which,  when 
the  certificate  is  surrendered  for  cancellation  and  reissue,  the 
number  of  the  certificate  issued  in  its  stead  is  entered.  The 
stub  when  filled  out  thus  contains  a  complete  record  of  its 
particular  certificate. 

When  stock  is  to  be  transferred,  a  new  certificate  should 


264    STOCK  RECORDS  AND  STOCK  TRANSFER 

never  be  issued  until  the  old  certificate,  properly  indorsed, 
has  been  surrendered ;  except  that  where  a  certificate  has  been 
lost  or  destroyed,  it  should  be  replaced  upon  the  filing  of  a 
proper  bond  of  indemnity  and  compliance  with  any  other  re- 
quirements of  the  by-laws.  The  surrendered  certificate  should, 
as  soon  as  received,  be  cancelled  by  cutting,  punching,  or  cross- 
ing out  the  signatures  and  by  writing  or  stamping  across  the 
certificate  the  word  "Cancelled. '*  This  is  done  to  prevent  the 
certificate  from  being  reissued  or  from  being  used  for  fraudu- 
lent purposes  in  case  it  is  stolen  or  otherwise  comes  into  the 
hands  of  improper  parties.  After  cancellation  the  certificate 
is  gummed  to  the  stub  from  which  it  was  originally  taken, 
the  proper  entries  are  made  upon  the  stub  (Forms  20  and  21 ), 
and,  so  far  as  that  particular  certificate  is  concerned,  the  mat- 
ter is  closed.  A  surrendered  certificate  should  never  be  re- 
issued or  again  put  in  circulation  under  any  circumstances. 

In  most  of  the  states  there  are  inheritance  tax  laws,  tax- 
ing the  transfer  of  property  of  decedents,  including  shares  of 
stock;  and  in  Massachusetts,  New  York,  and  Pennsylvania, 
a  stamp  tax  is  imposed  upon  the  sale  or  transfer  of  all  stock. 
It  is  the  duty  of  the  secretary  or  other  ofHcer  of  the  corpora- 
tion in  charge  of  the  stock  certificate  book,  to  see  in  each  in- 
stance, before  issuing  a  new  certificate,  that  all  requirements 
of  law  have  been  complied  with.  In  the  case  of  the  stamp 
transfer  tax,  this  requires  that  he  see  that  the  proper  stamps 
have  been  affixed  and  cancelled.  In  the  case  of  the  inheri- 
tance tax,  the  requirements  differ  under  the  statutes  of  the 
different  states ;  the  most  usual  provision  forbidding  the  trans- 
fer until  the  inheritance  tax  has  been  paid  or  a  waiver  ob- 
tained from  the  state  official  charged  with  the  collection  of 
the  tax.  The  corporation  is  in  all  cases  made  liable  to  a 
penalty  if  the  requirements  of  the  law  are  not  complied  with. 

Every  precaution  should  be  taken  to  avoid  mistakes  in 
issuing  certificates.     The  entries  on  the  stub  should  be  made 


THE    STOCK   RECORDS 


265 


before  the  certificate  is  separated  from  it.  Certificates  with 
space  for  the  name  left  blank  to  be  filled  in  later,  should  never 
be  issued.  Such  a  practice  prevents  absolutely  the  accurate 
recording  of  the  stockholders  of  the  corporation,  which  is 
legally  essential.  A  corporation  is  responsible  for  any  fraud 
or  error  committed  by  its  agents  in  the  issuance  of  stock.* 

The  secretary  usually  has  charge  of  the  stock  certificate 
book  and  prepares  the  certificates  for  issue.  Where  the  secre- 
tary receives  no  regular  salary  or  in  cases  where  there  are 
numerous  small  transfers  of  stock,  he  is  sometimes  authorized 
by  the  by-laws  or  by  resolution  of  the  board  of  directors  to 
charge  a  small  fee  for  transfers — usually  varying  from  10  to 
25  cents  for  each  certificate  issued.  This  is  occasionally  a  very 
convenient  regulation,  as  it  compensates  the  secretary  for  the 
time  and  labor  involved  in  the  issue  of  new  certificates  and 
also  tends  to  restrain  unnecessary  transfers.^ 

In  the  smaller  corporations  the  stock  certificate  book  is 
frequently  the  only  "stock  book"  maintained.  This  practice 
is  informal  and  does  not  keep  the  record  of  stockholders  in 
convenient  shape  for  reference,  but — in  the  absence  of  statutes 
requiring  other  stock  books  to  be  kept — is  not  legally  objec- 
tionable. The  stock  certificate  book  then  affords  the  sole 
record  of  those  who  are  stockholders  and  entitled  to  vote  and 
receive  dividends.^ 

§  251.     Stock  Ledger  and  Stock  Book 

In  almost  every  state  in  the  Union  some  form  of  stock 
record  is  prescribed  by  statute,  variously  termed  a  "stock 
book,"  "stock  ledger,"  "transfer  book,"  or  "stock  and  trans- 
fer book."  In  some  states  both  "stock  books"  and  "trans- 
fer books"   are  required.     The  intent  in  all  these  states  is 


*N.  Y.  &  N.  H.  R.  R.  Co.  v.  Schuyler,  34  N.  Y.  30  (1865). 
^  Giesen  v.  London,  etc..  Mortgage  Co.,  102  Fed.  Rep.  584  (1900). 
«  Chemical   Nat.   Bank  v.   Colwell,  132  N.   Y.  250  (1892) ;  In  re  U.   S.,  etc.,  Co.,  74 
N.  J.  L.  315  (1907). 


266    STOCK  RECORDS  AND  STOCK  TRANSFER 

to  preserve  an  accurate  record  of  the  stockholders  and  the 
stock  held  by  them. 

The  stock  ledger  and  the  stock  book  are  practically,  and 
should  be,  one  and  the  same  book,  ordinarily  kept  under 
the  title  ''stock  ledger"  or .  such  other  title  as  may  be  pre- 
scribed by  the  statutes.  This  stock  ledger  must  show  in 
alphabetical  order  the  names  and  addresses  of  the  stock- 
holders of  record,  the  amount  of  stock  held  and  from  whom 
and  when  this  stock  was  acquired,  and,  if  any  of  their  stock 
has  been  disposed  of,  to  whom  and  when  it  was  transferred. 
It  must  also  show  the  balance  of  stock  at  any  time  to  the 
credit  of  any  stockholder.  This  balance  gives  the  number 
of  shares  upon  which  such  stockholder  is  entitled  to  vote  and 
draw  dividends.     (See  Forms  24,  25,  and  26.) 

In  some  states  additional  data  must  be  entered.  Thus  in 
New  York  the  amount  received  by  the  corporation  on  any 
stock  acquired  by  a  stockholder  must  be  recorded ;  in  Missouri 
the  amount  of  capital  stock  subscribed,  the  corporate  assets 
and  liabilities,  and  addresses  of  corporate  officers  must  be 
included;  in  North  and  South  Dakota  instalments  paid  and 
unpaid  and  any  assessments  levied  and  paid  or  unpaid  must 
be  recorded;  in  Colorado  all  pledges  must  be  shown  by  the 
stock  book,  and  in  Vermont  the  articles  of  association  must 
appear  therein. 

The  statutes  in  many  states  are  very  peremptory  in  regard 
to  the  keeping  of  stock  books,  providing  severe  penalties  for 
failure.  Thus  in  New  York  the  statutes  not  only  prescribe 
heavy  penalties  for  failure  to  keep  stock  books  but  provide 
that  no  transfer  of  stock  shall  be  valid  as  against  the  corpora- 
tion, its  stockholders,  and  creditors — save  to  render  the  trans- 
feree subject  to  liability  as  a  stockholder — until  the  record 
thereof  has  been  duly  entered  in  the  stock  book.^ 

In  most  of  the  states  the  stock  book  must  be  kept  open 


'  N.  Y.  Stock  Corp.   Law,  §  32;  Penal  Law,  §  66$. 


THE    STOCK   RECORDS  267 

for  inspection  of  stockholders  or  creditors  of  the  corpora- 
tion, and  the  provisions  relating  to  the  stock  books  apply 
both  to  domestic  corporations  and  also  to  foreign  corpora- 
tions doing  business  in  the  particular  state.  Under  a  recent 
statute  in  New  York^  this  right  of  inspection  has  been  some- 
what curtailed,  and  the  right  is  limited  to  judgment  creditors 
of  the  corporation,  stockholders  who  have  been  stockholders 
of  record  for  at  least  six  months  immediately  preceding  the 
demand,  and  to  persons  holding  or  authorized  by  persons 
holding  stock  to  an  amount  equal  to  5  per  cent  of  all  its  out- 
standing shares.  There  had  undoubtedly  been  abuse  of  the 
right  of  inspection  for  improper  purposes,  or  for  purposes 
entirely  foreign  to  the  corporation,  but  the  statute  in  question 
has  received  much  criticism. 

The  stock  ledger  is  usually  posted  from  the  transfer  book 
and  its  balances  may  be  checked  from  time  to  time  by  com- 
parison with  the  number  of  shares  outstanding  as  shown  by 
the  open  stubs  of  the  stock  certificate  book.  (See  Forms  24, 
25,  and  26.) 

§  252.     Transfer  Book 

The  transfer  book  contains  not  only  a  record  of  transfers 
of  stock  of  the  particular  corporation  but  also  the  actual  in- 
struments of  assignment  by  which  these  transfers  were 
effected.  It  is  the  book  referred  to  by  the  usual  form  of  stock 
certificate  in  the  clause  reading  ''transferable  only  on  the  books 
of  the  company,  etc."  (See  Form  20.)  In  some  of  the  states 
a  transfer  book  is  a  statutory  requirement. 

The  transfer  book  is  found  in  two  general  forms.  As 
usually  kept  by  the  smaller  corporations  (Form  23),  it  con- 
sists of  a  series  of  blank  transfers  or  assignments  bound  in 
book  form.  These  are  filled  out  and  signed  by  the  owner  of 
stock  or  his  duly  authorized  attorney  when  the  actual  transfer 


*  Laws  of  1916,  Ch.  127. 


268    STOCK  RECORDS  AND  STOCK  TRANSFER 

of  stock  disposed  of  by  him  is  made  upon  the  books  of  the 
company.  They  are  primarily  designed  to  be  formal  evidence 
of  the  transfer  of  stock.  They  are  also  the  secretary's  au- 
thority for  the  issuance  of  new  certificates  of  stock  to  the 
assignee  in  place  of  the  old  certificates  surrendered. 

A  different  form  of  transfer  book  is  used  by  the  larger 
corporations  where  the  number  of  transfers  is  too  great  to 
permit  of  the  convenient  use  of  the  form  already  described. 
In  this  book  but  one  line  Is  required  for  each  transfer  of  stock, 
the  transferee  or  his  duly  authorized  attorney  signing  in  the 
right-hand  column. 

By  reference  to  the  assignment  on  the  back  of  the  stock 
certificate  (Form  22),  it  will  be  seen  that  the  assignment  of 
the  transfer  book  is  practically  a  duplication  of  that  on 
the  back  of  the  stock  certificate,  save  that  the  power  of  attor- 
ney to  transfer  the  stock  on  the  books  of  the  corporation  is 
omitted  from  the  transfer  book.  As  the  duly  executed  as- 
signment on  the  back  of  a  surrendered  stock  certificate  is  a  full 
and  sufficient  transfer  of  the  actual  ownership  of  the  stock 
and  justifies  the  secretary  in  issuing  another  certificate  in  the 
name  of  the  assignee,  many  of  the  smaller  corporations  never 
keep  a  stock  transfer  book,  relying  entirely  upon  the  stock 
certificate  book  with  its  stubs  and  duly  assigned  and  cancelled 
certificates  for  the  record  and  evidence  of  authorization  of 
transfers.  " 

When  the  transfer  book  is  used,  its  assignment  forms 
are  signed  either  by  the  party  making  the  transfer  or  by  his 
duly  authorized  agent.  Should  the  transferrer  come  in  person 
— as  he  has  the  right  to  do — and  sign  a  transfer  on  the  stock 
transfer  book,  there  is  no  legal  necessity  for  his  signature  to 
the  assignment  on  the  back  of  the  stock  certificate.  It  is,  how- 
ever, always  customary  for  him  to  execute  the  assignment  on 
the  back  of  the  surrendered  stock  certificate  as  well. 

It  is  but  seldom  that  the  transferrer  makes  the  transfer  on 


THE    STOCK    RECORDS 


269 


the  books  of  the  corporation  in  person.  In  perhaps  ninety- 
nine  cases  out  of  a  hundred  he  merely  signs  in  blank  the 
assignment  on  the  back  of  the  certificate  and  turns  it  over  to 
the  purchaser.  The  name  of  the  attorney  to  make  the  trans- 
fer is  then  inserted  at  the  time  the  certificate  is  presented 
for  transfer,  either  by  the  party  by  whom  the  certificate  is 
surrendered  or  by  the  secretary  of  the  company,  who  as  a 
matter  of  convenience  usually  inserts  his  own  name.  The 
attorney  so  designated  signs  the  transfer  on  the  transfer  book. 

§  253.     Closing  the  Books 

In  all  the  larger  corporations  it  Is  customary  to  close  the 
stock  books  to  transfers  prior  both  to  elections  of  directors 
and  the  payment  of  dividends,^  for  a  period  of  from  2  to  40 
days.  This  is  done  to  enable  the  corporate  officers  to  make  an 
accurate  list  of  those  entitled  to  receive  notice  of  meetings  and 
to  vote  thereat  or  to  receive  dividends. 

In  a  number  of  states  the  statutes  expressly  authorize  the 
stock  books  to  be  so  closed  to  transfers.  Where  this  is  not  the 
case,  it  may  be  provided  for  in  the  charter  or  by-laws.  The 
precise  number  of  days  for  which  the  transfer  books  are 
closed  is  usually  fixed  by  the  by-laws.  The  resolution  declar- 
ing dividends  usually  fixes  the  number  of  days  for  which  the 
books  shall  be  closed  before  the  dividend  day,  if  this  is  not 
prescribed  by  the  by-laws. 

In  some  cases  the  statutes  or  by-laws  merely  provide  that 
stock  shall  be  voted  by  the  owner  of  record,  as  shown  by  the 
books  of  the  company,  10,  20,  30,  or  40  days  before  an  elec- 
tion. This  wording  does  not  justify  closing  the  stock  books 
and  refusing  to  make  transfers.  In  such  case  transfers  are 
made  without  interruption,  but  the  secretary,  in  making  up  his 
lists  of  stockholders  for  the  election,  ignores  transfers  made 
after  the  fixed  date. 


•Joneg  V,  Terre  Haute,  etc,  R.  B.  Co.,  $7  N.  Y.  196  (1874). 


270 


STOCK  RECORDS  AND  STOCK  TRANSFER 


No  formality  attends  the  closing  of  the  stock  books  and 
usually  no  entry  thereof  is  made  upon  the  books,  the  secre- 
tary merely  refusing  to  transfer  certificates  presented  to  him 
for  that  purpose  during  the  prescribed  period.  The  notice 
of  the  annual  meeting  or  of  dividends  usually  sets  forth  the 
days  for  the  closing  and  reopening  of  the  transfer  books. 


CHAPTER    XXXVI 

TRANSFER    OF    STOCK 

§  254.     Procedure  of  Transfer 

When  stock  is  to  be  transferred,  one  of  the  following 
courses  is  ordinarily  pursued:  (i)  The  certificate  is  assigned 
in  blank  and  delivered  to  the  transferee,  in  which  case  the 
assignment  is  absolute^  and  the  certificate  may  then  be  passed 
from  hand  to  hand  and  the  ownership  of  the  stock  it  repre- 
sents be  thereby  transferred  any  desired  number  of  times 
without  change  of  or  addition  to  the  assignment.  (2)  The 
assignment  on  the  back  of  the  certificate  is  completed  by  the 
insertion  of  the  name  of  the  transferee  and  the  delivery  of 
the  certificate  to  the  transferee  (see  Form  22),  in  which  case 
the  certificate  must  be  surrendered  and  a  new  certificate  taken 
out  by  the  transferee  before  it  can  be  again  transferred.  (3) 
The  assignor  completes  the  assignment  form  on  the  back  of 
the  certificate,  surrenders  the  certificate  to  the  secretary  of 
the  company,  and  secures  and  makes  delivery  of  a  new  certi- 
ficate in  the  name  of  the  transferee.  (4)  The  certificate  is 
delivered  to  the  transferee  without  indorsement,  but  accom- 
panied by  an  instrument  of  assignment  or  power  of  attorney 
having  the  same  effect  as  the  indorsement  upon  the  back  of 
the  certificate. 

When  transfer  is  made  by  delivery  of  the  certificate  with 
the  name  of  the  transferee  inserted  in  the  assignment,  the 
transfer  is  not  made  on  the  books  of  the  corporation  until  the 
assigned  certificate  is  surrendered.  In  the  meantime  the  origi- 
nal owner  is  still  the  owner  of  record  and  will  therefore  be 


1  People  V.   Utah,   etc.,   Mines   Co.,   13s  App.   Div.   (N.   Y.)  418  (1909);   Morris  v. 
Hiissong,  etc.,  Co.,  81  N.  J.  Eq.  256  (1913). 

271 


2^2 


STOCK  RECORDS  AND  STOCK  TRANSFER 


held  should  any  stockholders'  liabilities  arise,  although  as 
between  the  immediate  parties  the  transfer  is  complete,  and 
the  transferrer  could  recover  from  the  transferee  any  assess- 
ment or  other  moneys  which  he  might  be  compelled  to  pay 
as  a  stockholder  of  record.  This  objection,  when  the  stock 
transferred  is  full-paid,  is  not  in  most  states  material  in  the 
case  of  ordinary  business  corporations;  but  when  stock  of 
banks,  trust  companies,  or  other  financial  corporations  is  trans- 
ferred, or  when  stock  is  not  full-paid,  it  may  be  material  and 
even  vital. 

When  transfer  is  made  by  assignment  in  blank,  and  the 
blank  has  been  filled  so  that  it  is  a  completed  assignment,  the 
transfer  on  the  books  of  the  corporation  is  not  made  until  the 
transferee  surrenders  the  assigned  certificate. 

An  objection  to  the  assignment  and  surrender  of  the  old 
certificate  by  the  transferrer  with  issue  to  him  of  a  new  certi- 
ficate in  the  name  of  the  transferee  is  sometimes  found  in  the 
fact  that  the  proposed  sale  or  other  arrangement  for  the 
transfer  of  the  stock  may  fail.  The  transferrer  in  such  case 
naturally  retains  the  new  certificate  but  finds  himself  in  the 
very  awkward  position  of  owning  stock  which  stands  on  the 
books  of  the  corporation  in  another's  name. 

In  practice  the  assignment  in  blank  on  account  of  its  con- 
venience, is  employed  in  the  great  majority  of  stock  transfers. 

When  the  holder  of  a  certificate  assigned  in  blank  wishes 
to  perfect  his  title  and  make  himself  a  holder  of  record,  he 
fills  in  his  own  name  as  assignee  and  surrenders  the  certificate 
to  the  secretary  or  transfer  agent  for  transfer.  He  may  also, 
if  he  sees  fit,  fill  in  the  name  of  the  party  who  is  to  make  the 
transfer  upon  the  books  of  the  corporation,  though  this  is 
usually  left  blank.  If  the  signature  to  the  assignment  is  gen- 
uine and  there  are  no  reasons  for  suspecting  any  irregularity, 
the  transfer  is  made  as  a  matter  of  course  and  a  new  certifi- 
cate i§  i33ued  in  the  name  of  the  assignee.     If  the  name  of 


TRANSFER    OF    STOCK  273 

the  attorney  to  make  the  transfer  is  left  blank  in  the  assign- 
ment of  the  surrendered  certificate,  the  secretary  of  the  cor- 
poration usually  fills  in  his  own  name  and  then  completes  the 
transfer,  thereby  avoiding  the  delay  that  might  result  if  some 
outside  party  were  designated  who  must  come  in  and  sign  the 
transfer  book  before  the  transfer  could  be  duly  recorded. 

When  the  assignment  on  the  back  of  the  certificate  has 
been  completed  by  the  insertion  of  the  assignee's  name,  the 
certificate  is  not  readily  negotiable  and  is  almost  invariably 
turned  in  and  a  new  certificate  taken  out.  If,  however,  condi- 
tions make  it  necessary  for  the  assignee  to  transfer  the  cer- 
tificate originally  assigned  to  him,  he  may  eflfect  the  trans- 
fer by  means  of  a  second  assignment — in  blank  if  desired — 
written  on  the  back  of  the  certificate,  or  written  on  a  separate 
sheet  and  attached  to  the  certificate. 

As  already  stated,  stock  assigned  by  indorsement  of  the 
certificate,  whether  in  blank  or  complete,  still  stands  on  the 
books  of  the  corporation  in  the  original  owner's  name  until 
the  certificate  is  surrendered  and  the  proper  entries  are  made 
on  the  stock  books  of  the  corporation.  Until  this  is  done  the 
original  owner  is  still  the  stockholder  of  record  and,  while  sub- 
ject to  any  stockholders'  liabilities  accruing  meanwhile,  has, 
on  the  other  hand,  a  legal  right  to  vote  and  to  receive  payment 
of  any  dividends  declared  even  though  the  actual  sale  of  his 
stock  was  consummated  months  before.^  His  right  to  vote 
is  absolute,  and  after  its  exercise  cannot  in  any  way  be  over- 
turned or  questioned.  His  right  to  dividends  is  qualified,  as 
the  dividends  belong  to  the  actual  owner  of  the  stock,  i.e.,  the 
person  possessing  the  duly  assigned  stock  certificate,  to  whom 
the  holder  of  record  must  account.  His  responsibility  as  to 
any  stockholders'  liability  is,  as  to  the  corporation,  absolute, 
but  for  any  such  payments  he  has  recourse  on  his  assignee. 


'Brisbane  v.   Delaware,   etc.,  R.    R.    Co.,  94  N.   Y.  204  (1883);   Cleveland,   etc.,   R. 
R.  Co.  V.  Robbins,  Admr.,  35  O.  St.  483  (1880). 


274    STOCK  RECORDS  AND  STOCK  TRANSFER 

Before  delivering  the  new  certificate,  the  secretary  should, 
when  possible,  require  the  party  who  presented  the  old  cer- 
tificate for  transfer — who  may  or  may  not  be  the  assignee — 
to  sign  a  receipt  therefor  on  the  stub.  If  the  new  certificate 
is  delivered  by  mail,  it  may  be  registered,  in  which  case  the 
stub  in  the  stock  certificate  book,  the  ofifice  copy  of  the  letter 
accompanying  the  certificate,  and  the  returned  registry  receipt, 
which  should  be  attached  to  the  stub,  make  a  sufficient  record 
of  the  transaction.  Blank  receipts  are  sometimes  sent  with 
the  certificates  in  such  cases,  to  be  signed  by  the  recipient  and 
returned,  and  these  receipts  when  received  by  the  secretary 
are  pasted  on  the  proper  certificate  stubs. 

Frequently  the  owner  of  stock  wishes  to  sell  or  transfer 
only  a  portion  of  the  stock  represented  by  a  certificate,  and 
in  such  case  the  assignment  on  the  back  of  the  certificate  may 
be  filled  out  according  to  the  facts.  For  instance,  if  Howard 
Fielding  owned  lOO  shares  of  stock,  all  included  in  a  single 
certificate,  and  wished  to  sell  20  shares  to  James  Wilton,  he 
might  fill  out  the  assignment  as  follows:  ''unto  James  Wilton 
twenty  shares  and  Howard  Fielding  eight)^  shares,"  or  if  the 
secretary  will  accept  the  somewhat  informal  assignment,  it 
might  be  merely  filled  out  ''unto  James  Wilton  twenty  shares," 
it  following  as  a  matter  of  course  that  if  only  20  shares  are 
assigned,  the  balance  of  the  stock  remains  with  the  assignor. 

The  owner  of  the  100  shares  then  brings  or  sends  in  his 
certificate  to  the  secretary  and  instructs  him  to  make  out 
two  new  certificates — one  for  20  shares  in  the  name  of  the 
new  owner,  the  other  for  80  shares  in  his  own  name.  The 
secretary  makes  the  proper  entries  on  the  stock  book,  cancels 
the  old  certificates,  issues  the  two  new  certificates  in  accord- 
ance with  his  instructions,  and  delivers  both — unless  he  has 
express  instructions  from  the  original  owner  to  the  contrary — 
to  this  original  owner,  who  then  makes  delivery  of  the  20- 
share  certificate  at  his  convenience.     The  secretary  must  be 


TRANSFER    OF   STOCK 


275 


governed  entirely  by  the  instructions  of  the  assignor  in  deliver- 
ing new  certificates,  no  matter  in  whose  name  these  certificates 
may  be  issued,  as  they  are  still  in  fact  the  property  of  the 
original  owner. 

Another  and  usually  preferable  method  when  but  a  por- 
tion of  the  stock  represented  by  a  certificate  is  to  be  trans- 
ferred, is  for  the  original  owner  to  have  the  new  certificates 
issued  to  himself.  When  this  is  to  be  done,  he  fills  in  his 
own  name  as  assignee,  instructing  the  secretary  to  issue  new 
certificates  for  the  proper  number  of  shares.  In  the  case  in- 
stanced he  would  have  two  certificates  issued — one  for  20 
shares  and  the  other  for  80  shares — in  his  own  name.  He 
would  then  assign  the  20-share  certificate  in  blank,  or  in  the 
name  of  the  new  owner,  and  deliver  it  if  the  transaction  is 
concluded.  The  new  owner  may  then  bring  in  and  surrender 
this  assigned  certificate  and  take  out  a  new  certificate  in  his 
own  name  at  his  convenience. 

When  this  plan  is  followed,  even  should  the  sale  fail  after 
new  certificates  were  issued,  the  original  owner  still  has  the 
stock  standing  on  the  books  of  the  corporation  in  his  own 
name  and  both  certificates  made  out  to  him;  whereas  if  the 
first  plan  had  been  followed,  one  of  the  certificates  being  made 
out  to  the  proposed  purchaser,  part  of  his  stock  would  stand 
on  the  books  in  the  transferee's  name,  and  the  real  owner 
must  either  secure  the  assignment  of  this  other  party  as  a 
matter  of  courtesy,  or  otherwise  be  put  to  much  trouble  to 
get  the  certificate  back  into  his  own  name. 

When  a  certificate  is  surrendered  for  reissue  in  one  or 
more  certificates  in  the  original  owner's  name,  the  transfer 
may  be  entered  on  the  transfer  book  as  a  matter  of  record, 
but,  as  the  owner's  stock  account  is  not  affected  one  way  or 
the  other  by  the  transaction,  it  should  not  be  posted  there- 
from to  the  stock  book.  A  memorandum  of  the  facts  should 
be  made  in  the  transfer  book  and  on  the  stubs  of  the  certifi- 


2^6 


STOCK  RECORDS  AND  STOCK  TRANSFER 


cates  involved  in  the  reissue,  and  the  certificate  numbers  in 
the  stock  book  must  be  corrected. 

When  a  certificate  is  lost  and  by  due  procedure  the  owner 
has  secured  an  order  from  the  board  of  directors  for  its  re- 
issue, the  secretary's  best  plan  is  to  treat  the  transaction  just 
as  he  would  if  the  owner  brought  in  a  certificate  with  a  request 
for  a  reissue,  save  that  he  must  of  necessity  omit  the  usual 
formality  of  the  cancellation  of  the  old  certificate.  The  owner 
should  be  required  to  sign  the  transfer  on  the  transfer  book, 
his  name  being  also  entered  as  the  transferee,  and  the  facts  of 
the  case  should  be  noted  on  the  transfer  book  and  on  the 
stubs  of  the  old  and  new  certificates.  The  transfer  is  not, 
however,  posted  from  the  transfer  book  to  the  stock  ledger, 
though  the  changed  certificate  numbers  should  be  noted  in 
this  latter  book. 

The  secretary  or  officers  of  the  corporation  may  refuse  a 
transfer  or  reissue  of  stock  until  the  old  certificate  has  been 
surrendered  or  until  any  other  proper  requirements  have  been 
complied  with.  When,  however,  this  has  been  done,  they  must 
make  the  desired  transfer  or  reissue.^  The  authenticity  of  the 
signature  to  an  assignment  of  a  stock  certificate  must  be  satis- 
factorily established  when  necessary.  In  the  smaller  corpora- 
tions the  secretary  is  usually  familiar  with  the  signatures  of 
the  stockholders.  The  larger  corporations  sometimes  require 
the  signatures  to  be  witnessed  or  guaranteed  by  some  person 
known  to  the  transfer  agent  or  otherwise  that  they  shall  be 
formally  acknowledged  before  a  notary  public.  If  there  is 
any  doubt  as  to  the  authenticity  or  correctness  of  the  assign- 
ment or  as  to  the  title  of  the  party  presenting  the  certificate,  or 
as  to  any  other  material  matter,  the  secretary  has  the  right  to 
delay  the  transfer  for  a  reasonable  time  in  order  to  communi- 
cate with  the  former  holder  or  take  such  other  steps  as  he 

3  Jones  V.   Terre   Haute,   etc.,   R.    R.    Co.,   57  N.   Y.    196  (1S74) ;   Robinson  v.   Na- 
tional Bank  of  New  Berne,  95  N.  Y.  6^  (1884). 


TRANSFER    OF    STOCK  277 

may  deem  expedient.  If  after  due  investigation  there  still  re- 
mains doubt  as  to  the  propriety  of  the  transfer  or  the  owner- 
ship of  the  certificate,  or  if  there  be  conflicting  claims,  the 
secretary  may  properly  decline  to  act  until  instructed  by  the 
board  of  directors,  and  the  board,  if  in  doubt,  may  decline  to 
take  action  in  the  matter  until  ordered  thereto  by  some  court 
of  competent  jurisdiction. 

§  255.     Transfer  of  Treasury  Stock 

When  treasury  stock  is  donated  to,  or  otherwise  acquired, 
by  a  corporation  (see  Chapter  XI,  ^Treasury  Stock"),  the 
assignment  may  run  to  the  corporation  direct,  as  **John  Mar- 
shall Company" ;  to  its  treasurer,  as  "Treasurer  of  John  Mar- 
shall Company";  or  to  a  trustee,  as  ''J^^^^i^  H.  McGowan, 
Trustee  for  John  Marshall  Company."  The  certificates  so 
assigned  are  cancelled  when  received  and  the  proper  entries 
are  made  on  the  transfer  book  and  stock  ledger.  When  such 
stock  is  held  in  the  name  of  the  company  or  even  by  the  treas- 
urer of  the  company,  no  new  certificates  need  be  issued  until 
the  stock  is  sold,  the  fact  that  certificates  are  not  issued  being 
noted  on  the  stock  books.  When  a  sale  of  such  stock  is  made, 
the  new  certificates  are  made  out  direct  to  the  purchaser.  Cer- 
tificates might  properly  be  issued  meanwhile  in  the  name  of 
the  company  or  to  the  treasurer  if  desired,  but  such  issue  is 
unnecessary  as  the  data  of  the  transfer  book,  the  entry  on  the 
stock  ledger,  and  the  cancelled  certificates  are  quite  sufficient 
to  evidence  the  transaction.  It  is  obvious  that  the  reasons 
that  make  the  certificate  desirable  when  stock  is  held  by  an 
individual,  do  not  apply  when  a  corporation  holds  its  own 
stock. 

When  treasury  stock  is  sold,  the  secretary  is  authorized 
by  due  resolution  of  the  board  of  directors  to  issue  the  proper 
certificates.  Such  transfers  are  entered  on  the  stock  books 
of  the  corporation  as  in  case  of  any  other  transfer  of  stock. 


278    STOCK  RECORDS  AND  STOCK  TRANSFER 

If  certificates  are  not  issued  for  the  stock  while  held  by  the 
corporation,  this  fact  should  be  noted  on  the  stock  books.  It 
is  not  necessary  to  issue  certificates  until  the  stock  is  sold. 

§  256.    Transfer  Agent  and  Registrar 

A  transfer  agent  in  the  modern  acceptation  of  the  term, 
is  one  who  supervises  and  certifies  transfers  of  corporate 
stock.  The  extent  of  his  supervision  depends  upon  custom  or 
upon  the  particular  agreement. 

A  transfer  agent  usually  keeps  the  stock  certificate  book 
in  his  custody.  When  a  transfer  is  to  be  made,  the  certificate 
of  stock  duly  assigned  is  surrendered  to  the  transfer  agent, 
who  thereupon  cancels  the  surrendered  certificate,  attaches  it 
to  its  proper  stub,  and  issues  a  new  certificate  in  the  name  of 
the  transferee.  This  certificate  is  then  sent  to  the  proper  cor- 
porate officials  who  affix  their  signatures  and  the  corporate 
seal — unless  the  seal  is  also  entrusted  to  the  transfer  agent — 
make  the  proper  records  in  the  transfer  and  stock  books,  and 
return  the  signed,  or  signed  and  sealed  certificate  to  the  trans- 
fer agent.  The  transfer  agent  thereupon  seals  the  certificate 
if  not  already  sealed,  indorses  it  in  evidence  of  its  due  issue, 
delivers  it  to  the  transferee,  and  the  transaction  is  closed. 

Occasionally  when  a  transfer  agent  is  employed,  the  stock 
certificate  book  is  retained  in  the  custody  of  the  corporation. 
In  such  case  when  a  certificate  is  presented  for  transfer,  it  is 
cancelled  by  the  transfer  agent  and  turned  over  to  the  corpo- 
ration in  exchange  for  a  new  certificate  issued  in  the  name 
of  the  transferee.  This  certificate  is  indorsed  by  the  transfer 
agent  and  delivered  to  its  owner.  When  the  stock  certificate 
book  is  kept  by  the  corporation,  the  transfer  agent  keeps  an 
independent  record  of  stock  certificates  issued  and  surren- 
dered, in  order  that  the  regularity  of  any  particular  transfer  or 
issue  may  be  readily  and  definitely  ascertained. 

A  registrar  is  a  corporate  appointee  who  also  supervises 


TRANSFER   OF    STOCK 


279 


the  transfer  of  corporate  stock  but  does  not  usually  carry  his 
supervision  to  the  same  extent  as  does  the  transfer  agent,  his 
function  being  merely  to  register  stock  as  issued.  He  main- 
tains a  record  of  all  stock  certificates  issued  and  of  the  sur- 
render and  reissue  of  any  new  certificates  with  the  names  of 
the  parties  to  the  transfer.  If  an  issue  or  transfer  is  to  be 
made,  the  registrar  passes  upon  the  certificates  and  counter- 
signs them  if  they  are  correctly  issued.  His  signature  is 
evidence  of  due  issuance. 

It  will  be  seen  that  the  duties  of  the  transfer  agent  and 
registrar  are  distinct,  and  should  not  be  performed  by  a  single 
person  or  institution.  The  function  of  the  transfer  agent  is 
to  insure  the  proper  issue  of  stock.  The  function  of  the 
registrar  is  to  insure  the  regularity  of  issue  and  to  prevent 
overissues.  The  functions  of  the  two  somewhat  overlap,  as 
the  transfer  agent  would  not  permit  an  overissue  of  stock  nor 
would  the  registrar  sign  stock  improperly  issued. 

It  is  obvious  that  the  work  of  a  transfer  agent  and  regis- 
trar to  be  effective  must  be  discharged  by  persons  or  institu- 
tions of  the  highest  character  and  unquestioned  standing.  For 
this  reason  trust  companies  are  usually  appointed. 

Speaking  generally,  the  employment  of  transfer  agents 
and  registrars  is  advisable  whenever  transfers  of  stock  are 
likely  to  be  numerous.  The  procedure  involved  is  simple  in 
theory  but  in  practice  involves  much  detailed  work.  Also  it 
is  usually  desirable  that  transfers  be  effected  rapidly  and  ac- 
curately. The  employment  of  the  proper  transfer  agent  and 
registrar,  or  transfer  agent  alone,  relieves  the  corporate  offi- 
cials from  the  detailed  work  and  responsibility  involved,  re- 
duces the  possibility  of  fraud  or  error  in  the  issuance  of  stock 
to  a  minimum,  and  affords  a  general  safety  and  convenience 
not  otherwise  secured.  Stock  exchanges  require  that  the  se- 
curities listed  by  them  shall  be  issued  through  suitable  transfer 
agents  and  registrars. 


28o    STOCK  RECORDS  AND  STOCK  TRANSFER 

§  257.     Lost  and  Stolen  Certificates 

A  stockholder  so  shown  by  the  books  of  his  company,  is 
entitled  to  every  right  and  privilege  of  a  stockholder  without 
regard  to  the  whereabouts  of  his  certificate/ 

When  certificates  are  lost,  the  owner  usually  desires  to 
have  new  certificates  issued,  not  in  order  to  secure  any  cor- 
porate rights  but  merely  to  have  his  interest  in  such  shape 
that  he  may  readily  sell,  pledge,  or  otherwise  use  his  stock. 
Stockholders  have  a  general  right  to  certificates^  and,  if  their 
certificates  are  lost,  to  have  them  replaced,  but,  before  it  re- 
issues any  such  certificates,  the  corporation  on  its  part  has 
the  right  to  require  reasonable  safeguards  for  its  own  protec- 
tion.^ The  by-laws  should  outline  the  proper  procedure, 
which  must  conform  to  any  statutory  requirements.  (See 
Form  7. )    , 

A  bond  of  indemnity  is  usually  and  properly  required  be- 
fore a  lost  certificate  is  replaced,  as  it  is  always  possible  that 
the  missing  certificate  may  turn  up  in  the  hands  of  an  inno- 
cent purchaser  for  value,  who  might  have  cause  for  damages 
against  the  corporation  if  it  refused  to  recognize  his  rights. 
It  is  but  seldom  wise  to  reissue  lost  certificates  unless  such 
bond  is  given.  Only  the  absolute  and  irrecoverable  loss  of  a 
certificate,  as  in  case  of  its  unquestioned  destruction  by  fire, 
would  justify  an  unprotected  reissue. 

When  the  value  of  missing  certificates  is  considerable  and 
the  circumstances  are  doubtful,  it  is  sometimes  best  for  the 
directors  to  refuse  absolutely  to  replace  the  certificates  until 
the  owner  secures  an  order  from  some  court  of  competent 
jurisdiction.  When  this  is  done  the  directors  are  relieved 
from  all  responsibility  in  the  matter.    The  officers  of  the  com- 


*  National  Bank  v.  Watsontown  Bank.  105  U.  S.  217,  223  (1881) ;  Birmingham  Na- 
tional Bank  v.  Roden,  ^  Ala.  404  (1892);  Wheeler  v,  Millar,  90  N.  Y.  353.  (18&2). 

B  Buffalo,  etc.,  R.  R.  v.  Dudley,  14  N.  Y.  336  (347)  (1856);  Fletcher  v.  McGill, 
no  Ind.  395   (1886). 

«  Guilford  v.  W.  U.  Tel.  Co.,  43  Minn.  434  (1890) ;  Butler  v.  Glen  Cove  Starcn 
Mfg.   Co.,  18  Hun  47  (1879). 


TRANSFER    OF    STOCK  281 

pany  should  never  take  the  responsibility  of  reissuing  a  lost 
or  stolen  certificate  of  stock  without  express  authorization 
from  the  board  of  directors.  Should  they  do  so  and  the  miss- 
ing certificate  turn  up  in  such  a  way  that  loss  is  involved,  they 
would  be  responsible  to  the  corporation. 

In  case  certificates  are  lost  or  stolen,  the  secretary  of  the 
company  or  its  transfer  agent  should  be  immediately  notified, 
and  such  other  steps  be  taken  as  may  be  necessary  to  prevent 
the  negotiation  of.  the  missing  certificates.  When  lost  certifi- 
cates are  indorsed  in  blank  and  are  presented  to  the  transfer 
ofilicers  of  the  corporation  before  these  offtcials  have  been 
notified  of  the  loss,  they  may  make  the  transfer,  and  the  corpo- 
ration will  not  be  liable  to  the  owner  if  the  circumstances  were 
such  as  to  justify  the  belief  that  such  transfer  was  regular 
and  in  good  faith.  If,  however,  the  proper  officials  have  been 
warned  of  the  loss»  or  the  circumstances  were  such  as  to  put 
them  on  notice,  they  could  not  safely  make  such  transfer. 

In  states  where  the  common  law  prevails,  a  stock  certificate 
is  not  perfectly  negotiable  as  are  notes,  drafts,  and  other  forms 
of  negotiable  paper,  but  is  quasi-negotiable,  and  usually  an 
innocent  purchaser  for  value  of  a  properly  indorsed  certificate 
is  protected.^  "Excepting  in  cases  of  certificates  transferred 
in  blank  and  lost  or  stolen  without  negligence  on  the  part  of 
the  owner,  a  bona  fide  purchaser  is  protected  now  in  almost 
every  instance  where  he  would  be  protected  if  he  were  pur- 
chasing a  promissory  note  or  other  negotiable  instrument."^ 

Thus  a  party  finding  or  stealing  certificates  of  stock  even 
though  these  certificates  are  indorsed  in  blank,  takes  no  title 
nor  does  any  one  who  buys  the  lost  or  stolen  certificates  from 
him,  the  title  remaining  in  the  original  owner.^    If,  however. 


■^Knox  V.  Eden  Musee  Co.,  148  N.  Y.  4411  (1896);  Trust  &  Sav.  Co.  v.  Home 
Lumber  Co.,  118  Mo.  447  (1893). 

82  Cook  on  Corp.  §416;  Real  Estate  Trust  Co.  v.  Bird,  90  Md.  229  (1899);  Jarvis 
V.  Manhattan  Beach  Co.,  148  N.  Y.  652  (1896). 

*  O'Herron  v.  Gray,  168  Mass.  S73  (1897,) ;  Hannahs  v.  Hammond  Typewriter  Co., 
15S  App.  Div.  (N.  Y.)  620  (1913);  Barstow  v,  City  Trust  Co.,  216  Mass.  530  (19.14). 


282    STOCK  RECORDS  AND  STOCK  TRANSFER 

a  lost  or  stolen  certificate  is  surrendered  to  the  corporation 
and  a  new  certificate  received  in  its  place — as  might  readily  be 
the  case  if  the  corporate  officials  were  not  promptly  notified 
of  the  loss — any  purchaser  in  good  faith  of  this  new  certifi- 
cate takes  a  clear  title.  The  original  owner  has  then  lost  all 
rights  in  the  matter  save  that  of  bringing  suit  against  those 
through  whose  hands  the  certificate  passed  before  its  reissue  by 
the  corporation. 

In  case  of  any  doubt  or  any  dispute  as  to  ownership  of 
a  certificate,  no  transfer  should  be  made  by  the  corporation 
until  the  true  ownership  has  been  definitely  determined. 

In  order  to  secure  the  greatest  possible  security  to  pur- 
chasers of  stock,  and  to  facilitate  the  free  transfer  of  shares, 
an  act  known  as  the  "Uniform  Transfer  Act"  has  been  adopted 
with  only  slight  variations  in  form  in  New  York,  Pennsyl- 
vania, Massachusetts,  New  Jersey,  and  a  'number  of  other 
states.  By  this  act  certificates  of  stock  are  made  negotiable 
instruments  subject  to  the  rules  of  the  law  governing  com- 
mercial paper.  The  step  is  really  not  a  radical  one,  for,  as 
has  been  shown,  the  courts  have  gone  far  in  cases  under  the 
common  law  to  protect  bona  fide  purchasers.  The  statutes,  of 
course,  are  not  extra-territorial  in  their  scope,  and  by  pro- 
visions in  the  acts  themselves  apply  only  to  certificates  issued 
after  their  passage. 

§  258.     Pledges  of  Stock 

The  quasi-negotiability  of  stock,  and  in  many  states  its 
full  negotiability,  renders  its  use  as  a  pledge  or  collateral  se- 
curity a  very  simple  matter,  effected  by  the  mere  indorsement 
and  delivery  of  the  certificate.^^  The  usual  procedure  is  for 
the  pledgor  to  give  his  note  for  the  amount  secured,  the  note 
reciting  the  pledge  of  stock  and  the  terms  under  which  it  is 


10  Christian  v.   Atlantic   &  N,    C.    R.    R.,   1.3(3   U.    S.  233   (1890);   Seymour  v.    Hen- 
dee,  54  Feb.   Rep.  563  (1893)  5  Atkinson  et  al.  v.   Foster,  134  111.  472  (1890). 


r,/ 


TRANSFER   OF    STOCK 


283 


held.  These  terms  usually  empower  the  pledgee  to  sell  the 
collateral  without  notice  to  the  pledgor.  The  delivery  of  the 
stock  as  security  is,  however,  the  essential  feature  constituting 
the  pledge  without  any  written  contract,^^  which  is  necessary 
only  as  a  record  and  proof  of  the  transaction. 

The  pledgee  may  or  may  not,  at  his  option,  have  the 
pledged  stock  transferred  on  the  books  of  the  corporation  to 
his  own  name.^^  If  transferred,  the  word  "pledgee"  should 
follow  the  name  of  the  owner  on  the  new  certificates  of  stock 
or  otherwise  the  phrase  "as  collateral  security"  should  appear 
on  the  certificates  so  as  to  characterize  definitely  the  nature  of 
the  pledgee's  holding.  A  memorandum  of  the  facts  should 
also  appear  in  the  stock  ledger  against  the  entry  in  both 
pledgee's  and  pledgor's  accounts.^^  Such  entries,  if  showing 
clearly  the  nature  of  the  transaction,  relieve  the  pledgee  of 
any  corporate  liabilities  involved  in  the  absolute  ownership 
of  the  stock."  .  In  some  states  the  pledgee  is  expressly  re- 
lieved from  these  liabilities  by  statute. ^^  When  stock  is  trans- 
ferred on  the  books  of  the  company  to  the  pledgee,  the  voting 
right,  as  a  general  rule  and  in  the  absence  of  any  agreement 
to  the  contrary,  follows  the  stock. ^^  In  some  states,  however, 
as  in  New  York,  the  owner  of  the  stock  may  demand  and 
receive  a  proxy  from  the  pledgee  upon  paying  any  necessary 
expenses.  In  other  states,  as  New  Jersey,  if  it  appears  on  the 
transfer  books  that  such  stock  has  been  transferred  only  as 
a  pledge,  the  owner  retains  the  right  to  vote  thereon.  Statutes 
protecting  the  voting  rights  of  pledgors  are  found  in  many 
states. 

11  Masury  v.  Arkansas  National  Bank.  93  Fed.  Rep.  603,  607  (1899) ;  Spreckels  v. 
Nevada  Bank,  :,i3  Gal.  2712  (1896);  Brick  v.  Brick,  98  U.  S.  514  (1878). 

"  Day  V.  Holmes.  103  Mass.  306  (1869) ;  Fitchburg  Savings  Bank  v.  Torrey,  134 
Mass.  239  (1883);  Anderson  v.  Philadelphia  Warehouse  Co.,  ii.i  U.  S.  479  (1884). 

^3  2  Cook  on  Corp.,  §  466. 

"  Pauly  V.  State  Loan  &  Trust  Co.,  165  U.  S.  606  (1897) ;  Tourtelot  v.  Stolteben, 
loi  Fed.  Rep.  362  (1900). 

"  Barre  National  Bank  v.  Hingham  Manuf.  Co.,  127  Mass.  j^'  (1879) ;  Burgess 
V.  Seligman,  107  U.  S.  20  (1882). 

18  Commonwealth  v,  Dalzell,  152  Pa.  St.  217  (1893);  Re  Argus  Printing  Co.,  i  N. 
Dakota  434  (1891);  s.  c,  12  L.  R.  A.  781,  and  note. 


284    STOCK  RECORDS  AND  STOCK  TRANSFER 

When  stock  Is  pledged,  the  pledgee  is  entitled  to  receive 
any  dividends  declared  meanwhile,  and,  if  the  stock  has  been 
transferred  to  the  pledgee,  or  if  the  company  has  been  properly 
notified  that  the  stock  is  held  in  pledge,  they  must  be  paid  to 
him/'^  In  the  absence  of  notice  or  transfer,  as  the  pledgor 
remains  the  owner  of  record  of  the  pledged  stock,  dividends 
are  properly  paid  to  him,  and  the  pledgor  and  pledgee  must 
then  settle  the  ownership  of  the  dividends  between  themselves. 
On  the  termination  of  the  pledge,  the  pledgee  must  account  for 
any  dividends  received  by  him. 

Upon  default  in  payment  of  the  amount  it  secures,  the 
pledgee  has  the  right  to  sell  pledged  stock.  If  the  note  or 
other  memorandum  of  the  pledge  contains  no  agreement  or 
provision  for  such  sale,  the  pledgee  must  give  the  pledgor  due 
notice  of  his  intention  to  sell  the  stock  and  thereupon  may  sell 
the  stock  at  public  sale  and  apply  the  proceeds  to  the  payment 
of  his  debt.  Notice  must  be  given  the  pledgor  a  reasonable 
time  before  the  sale  and  such  notice  must  specify  the  time  and 
place  of  sale,  both  of  which  must  also  be  reasonable. 
Two  days'  notice  has  on  occasion  been  held  sufficient,^^  and 
four  days'  notice  when  the  parties  lived  in  different  towns.^^ 

When  notice  of  time  and  place  is  waived  by  express  terms 
of  the  pledgor's  agreement,  as  is  usually  the  case,  the  pledgee 
may  sell  at  any  time  after  default.  The  sale  must  be  by  public 
auction,  unless  otherwise  agreed,  must  be  in  good  faith,  and 
an  endeavor  must  be  made  to  obtain  a  fair  price.  The 
pledgee  himself  may  not  bid  the  stock  in,  either  directly  or 
indirectly.  If  he  does,  the  pledgor  may  have  the  sale  set  aside. 
In  many  of  the  states  the  whole  matter  of  the  pledge  cf  stock 
and  its  sale  is  regulated  by  statute. 

At  any  time  before  sale  the  pledgor  may  pay  the  debt  and 


^7  Fairbanks   v.    Merchants    National    Bank.    132   111.    i^    (1889);   Gviarantee    Co.    v. 
East   Rome  Co.,  -96  Ga.  511    (1895);   Nat.   Bank  v.   Equitable  Trust   Cv> ,  22j  Fed.  5^6 

(1915)- 

"  Edwards  on  Bailments,   §  285- 

»"  Guinzburg  v.  Downs  Co.,  165  Mass.  467  (189O. 


TRANSFER   OF    STOCK 


285 


all  interest  and  any  reasonable  expense  involved  in  the  pre- 
liminaries of  the  sale  and  claim  his  stock.  This  stock  need  not 
be  the  particular  shares  pledged  but  merely  an  equal  amount 
of  the  same  stock. 

§  259.     Restrictions  on  Transfers 

Every  stockholder  whose  stock  is  paid  for  in  full  is  en- 
titled to  transfer  his  stock  freely.  Even  where  the  stockholders 
have  entered  into  a  contract  to  restrain  the  alienation  of  stock 
or  have  enacted  by-laws  for  the  same  purpose,  the  courts  have 
usually  set  the  restraining  provisions  aside  as  being  contrary 
to  public  policy.^*'  Charter  provisions  restricting  the  transfer 
of  stocks  have,  however,  been  held  valid. ^^ 

In  some  states  the  statutes  prescribe  specifically  that  stock 
subscribed  but  not  fully  paid  for  in  accordance  with  the  sub- 
scription agreement  is  not  transferable  save  with  the  consent 
of  the  corporation.  Elsewhere  charter  or  by-law  provisions 
may  give  the  corporation  the  right  to  refuse  to  register  trans- 
fers of  unpaid  stock.^^  In  the  absence  of  such  provision,  the 
right  of  transfer  is  absolute  and  may  be  enforced  against  the 
corporation,  ^l 

At  times  the  restriction  of  stock  transfers  becomes  desir- 
able and  various  plans  have  been  attempted  to  effect  this  end. 
The  courts,  however,  defend  this  right  so  strictly  that  its  legal 
waiver  is  difificult.  Perhaps  the  most  successful  method,  when 
all  the  parties  are  in  agreement,  as  to  the  advisability  of  such 
restraint  is  to  form  a  voting  trust  for  a  certain  nmnber  of 
years.  All  the  stock — or  all  the  stock  entering  into  the  agree- 
ment— is  placed  in  the  hands  of  voting  trustees  appointed  un- 


20  Johnson  v.  Laflin,  1031  U.  S.  800,  803  (1880);  Quiner  v.  Marblehead,  etc.,  Co.,  10 
Mass.,  476  (1813);  Morris  v.  Hussong  Dyeing  Machine  Co.,  81  N,  T.  Eq.  256  (1913); 
Steele  v.  Farmers',  etc..  Telephone  Assn.,  148  Pac.  (Kan.)  661  (191^);  Kretzer  v. 
Cole  Bros.,  etc.,  Co.,  181  S.  W.  (Mo)  1066  (1916). 

21  Longyear  v.   Hardman,  219  Mass.  405  (i9i4). 

22  Barrett  v.   King,  181  Mass.  476  (190^2).  ^ 

23  Craig  V.  Hespeira  L.  &  W.  Co.,  113  Cal,  7  (1896) ;  Kinnan  v.  buHivan  County 
Club,  26  App.  Div.  21^  (1898). 


286    STOCK  RECORDS  AND  STOCK  TRANSFER 

der  the  terms  of  the  voting  trust  agreement  and  is  held  by 
them,  withdrawn  from  sale,  for  the  period  of  the  trust.  Such 
arrangements  are  effectual  and  are  upheld  by  the  courts  in 
most  states  if  they  do  not  extend  for  an  unreasonable  period.^* 
(See  Chapter  LII,  "Voting  Trusts.")  In  some  states  they  are 
expressly  permitted  by  the  statutes  under  restrictions  as  to 
the  term  of  their  duration. 

§  260.     Lien  of  Corporation 

At  common  law  a  corporation  has  no  lien  upon  its  shares 
for  debts  due  to  it  from  its  stockholders.  The  authority  for 
any  lien  which  the  corporation  may  have  must,  therefore,  be 
found  in  the  statutes,  its  charter,  or  its  by-laws.^''  Where  the 
lien  is  given  by  statute  or  charter,  the  lien  is  enforcible  against 
the  stock  into  whosoever  hands  it  may  come  irrespective  of 
whether  the  assignee  has  any  actual  knowledge  of  the  statute 
or  charter  provision.^^  Where  an  attempt  has  been  made  to 
create  a  lien  by  provision  in  the  by-laws,  it  has  generally  been 
held  that  the  stock  is  not  bound  in  the  hands  of  an  assignee 
who  took  without  notice,^^  actual  or  constructive,  of  the 
lien  provision. 

In  New  York,  Massachusetts,  Pennsylvania,  New  Jersey, 
and  other  states  which  have  adopted  the  law  regulating  the 
transfer  of  stock,  known  as  the  "Uniform  Stock  Transfer 
Act,"  there  can  be  no  lien  or  restriction  upon  the  transfer  of 
shares  by  virtue  of  a  by-law  or  otherwise,  unless  the  right  of 
the  corporation  to  such  lien  or  restriction  is  stated  on  the  cer- 
tificate. 


"  Brown  v.  Britton,  41  App.  Div.  57  (1899) ;  Williams  v.  Montgomery,  148  N.  Y. 
519  (1896);  Hey  V.  Dolphin,  92  Hun  (N.  Y.)  230  (1895). 

=»2  Cook  on  Corp.,  §  5122;  DriscoU  v.  West  B.  &  C.  M.  Co.,  59  N.  Y.  96  (1874). 

^Curtice  v.  Bank,  no  Fed.  830  (1901) ;  United,  etc.,  Co.,  v.  Winston,  etc.,  Co., 
194  Fed.  947  (1912). 

"Driscoll  V.  West  B.  &  C.  M.  Co.,  59  N.  Y.  96  (1874);  Bankers'  Trust  Co.  v. 
McCloy,  159  S.  W.  (Ark.)  205  (1913). 


CHAPTER   XXXVII 

RULES  REGULATING  TRANSFERS 

§  261.    Responsibility  of  Corporation  as  to  Transfers 

It  is  the  duty  of  the  corporation  to  record  all  lawful  trans- 
fers; and  if  it  refuses,  the  record  may  be  compelled  by  re- 
course to  the  courts,^  or  the  corporation  may  be  held  liable  in 
damages.^  If  there  is  doubt  as  to  the  identity  of  the  trans- 
feree or  the  authenticity  of  the  transferrer's  signature,  the 
corporation  may  require  proper  proof  thereof,  and  in  cases 
where  two  parties  claim  the  ownership  of  stock  or  where  the 
corporation  has  been  notified  not  to  register  a  transfer,  the 
corporation  may,  if  there  is  any  real  uncertainty  or  reason 
therefor,  decline  to  make  any  record  on  the  corporate  books 
until  the  matter  has  been  settled  by  the  courts.^ 

The  corporation  is  responsible  if  its  officials  record  a 
forged  transfer.*  It  is  the  duty  of  the  corporate  officials  to 
know  the  stockholders'  signatures  or  otherwise  to  secure  evi- 
dence of  their  authenticity  before  making  a  transfer.  For 
this  purpose,  they  may  require  the  personal  attendance  of  the 
transferrer  or  clear  proof  that  his  signature  is  genuine. 

In  case  stock  certificates  indorsed  in  blank  are  lost  or 
stolen,  the  corporation  is  not  liable  for  receiving  the  certifi- 
cates and  transferring  the  stock  represented  thereby,  if  the 


1  Real  Estate  Trust  Co.  v.  Bird,  90  Md.  229  (1899) ;  Rice  v.  Rockefeller  et  al 
134  N.  Y.  174  (1892).  „     , 

«Hine  v.  Commercial  Bank  of  Bay  City,  119  Mich.  4^8  (1899);  Ralston  v.  Bank 
of  California,  112  Gal.  ao8  (1896);  Commercial  Bank,  etc.  v.  Kortnght,  22  Wend. 
(N.  Y.)  348  (1839). 

» Tel.  Co.  V.  Davenport,  97  U.  S.  369  (1878) ;  Athol  Savings  Bank  v.  Bennett,  203 
Mass.  480  (1909);  Amparo  Mining  Co.  v.  Fidelity  Trust  Co.,  75  N.  J.  Eq.  555.  559, 
(1909). 

*  Cushman  v.  Thayer,  etc.,  Co.,  76  N.  Y.  365  (1879) ;  Chicago  Edison  Co.  v.  Fay, 
164  111.  3^3  (1896). 

287 


288         STOCK   RECORDS   AND    STOCK   TRANSFER 

circumstances  are  not  suspicious  and  the  transfer  is  made  be- 
fore notice  of  the  theft  or  loss  is  received  by  the  corporation.^ 

§  262.     Duties  of  Officers  as  to  Transfers 

"The  officers  of  the  company  are  the  custodians  of  its 
stock-books,  and  it  is  their  duty  to  see  that  all  transfers  of 
shares  are  properly  made,  either  by  the  stockholders  themselves 
or  persons  having  authority  from  them.  If,  upon  the  presen- 
tation of  a  certificate  for  transfer,  they  are  at  all  doubtful  of 
the  identity  of  the  party  offering  it  with  its  owner,  or  if  not 
satisfied  of  the  genuineness  of  a  power  of  attorney  produced, 
they  can  require  the  identity  of  the  party  in  the  one  case,  and 
the  genuineness  of  the  documents  in  the  other,  to  be  satis- 
factorily established  before  allowing  the  transfer  to  be  made. 
In  either  case  they  must  act  upon  their  own  responsibility."® 
The  record  of  any  proper  transfer,  if  refused,  may  be  com- 
pelled by  either  transferrer  or  transferee. 

§  263.     Who  May  Transfer  Stock 

Any  person  of  full  age  who  has  not  been  adjudged  incom- 
petent, may  transfer  stock  standing  in  his  own  name.  All  who 
are  duly  authorized  to  represent  others,  as  attorneys,  trustees, 
guardians,  executors,  and  administrators,  may  transfer  stock 
belonging  to  these  others  upon  giving  satisfactory  evidence 
of  their  authority  so  to  do.  Stock  belonging  to  minors  and 
others  incompetent  to  contract  may  be  transferred  only  by 
their  legally  appointed  and  authorized  representatives. 

The  holder  of  unpaid  stock,  i.e.,  stock  upon  which  the 
subscription  or  purchase  price  has  not  been  fully  paid,  may 
as  a  rule  transfer  his  stock  without  restriction,  but  in  some 
states  by  statute  provision  such  transfer  is  prohibited  or  may 
be  made  only  by  consent  of  the  corporation. 

^  Mandelbaum   v.    North   American    Mining   Co.,    4   Mich.    464   (185.7);    Dewing  v, 
Perdicaries,  96  U.  S.   193   (1877). 

«Tel.  Co,  V.  Davenport,  97  U.  S.  369  (1878). 


RULES  REGULATING  TRANSFERS       289 

§264.     To  Whom  Stock  May  be  Transferred 

There  are  but  few  restrictions  as  to  the  transferees  of 
stock.  A  corporation  may,  if  its  officials  see  fit,  refuse  to 
transfer  stock  to  anyone  not  competent  to  assume  the  obHga- 
tions  of  a  stockholder,  such  as  a  minor  or  a  person  of  un- 
sound mind.  Also  a  corporation  when  in  a  failing  condition 
may  refuse  to  transfer  stock  to  an  irresponsible  transferee.^ 
Beyond  these  few  exceptions,  stock  may  be  transferred  freely 
and  in  the  absence  of  fraud  the  transfer  is  valid  and  must  be 
recorded  by  the  corporation. 

§  265.     Liability  Involved  in  Transfers 

The  liability  of  impaid  stock  obtains  in  every  state  of  the 
Union.  Full-paid  stock,  on  the  other  hand,  involves  no  lia- 
bility to  the  corporation  or  its  creditors  whatsoever,  save  in 
the  case  of  financial  institutions — on  the  stock  of  which  a 
further  liability  is  usually  imposed — and  in  those  states  in 
which  by  express  statutory  provision  liabilities  are  imposed  or 
assessments  are  permitted  on  stock  even  though  full-paid. 

When  liabilities  do  or  may  exist  on  full-paid  stock,  and 
transfers  of  -such  stock  are  made  between  parties  competent  to 
contract,  any  liabilities  accruing  before  the  transfer  remain 
with  the  transferrer,  but  any  liabilities  accruing  thereafter  pass 
to  the  transferee. 

The  liabilities  of  unpaid  stock  are  affected  by  statute  pro- 
visions in  a  number  of  states,  but  otherwise  are  subject  to 
the  general  rules  that  the  transferrer  is  liable  for  any  calls  or 
assessments  already  made  and  which  are  still  unpaid,^  but  the 
transferee  is  liable  for  the  amount  that  has  not  yet  been  called. 

An  exception  to  this  general  rule  obtains  when  a  transfer 
has  been  made  but  has  not  been  recorded  on  the  books  of  the 


'2  Cook  on   Corps.,  §395. 

8  May  V.  McQuillan,  129  Mich.  392  (1902);  Sigua  Iron  Co.  v.  Brown,  171  N.  Y. 
[88  (190a);  Webster  v.  Upton,  Assignee,  91  U.  S.  65  (1875);  Pullman  v.  Upton,  96 
U.  S.  328  (1877). 


290 


STOCK  RECORDS  AND  STOCK  TRANSFER 


corporation.  In  such  case  the  transferrer  is  still  the  owner  of 
record  and  is  therefore  still  liable  for  any  amounts  unpaid  on 
his  transferred  stock  and,  if  calls  are  made  before  the  transfer 
is  recorded,  must  pay  them.  He  may  collect  these  payments, 
if  he  can,  from  the  transferee. 

Another  exception  to  the  general  rule  is  found  when  the 
corporation  has  wrongfully  issued  stock  certificates  marked 
"Full-paid,"  in  which  case  any  bona  fide  purchaser  of  such 
certificates  without  knowledge  of  the  true  character  of  the 
stock  takes  it  free  from  liability  to  the  corporation  and  to  cor- 
porate creditors  in  case  the  corporation  becomes  insolvent.^ 
This  is  also  true  when  a  purchaser  in  good  faith  takes  over 
stock  under  such  circumstances  as  to  lead  him  to  believe  it  is 
full-paid.  In  any  such  case,  as  far  as  the  transferee  is  con- 
cerned, the  stock  is  held  to  be  full  paid  and  the  corporation 
or  its  creditors  cannot  hold  him  liable. 

In  the  following  cases  the  rule  as  to  the  liabilities  involved 
in  transfers  of  stock  is  as  set  forth. 

A  married  woman  may  take  stock  in  her  own  name,  in 
practically  every  state  of  the  Union,  and  take  therewith  every 
right  and  responsibility  of  ownership.^® 

A  minor  may  receive  a  transfer  of  stock  and  the  corpora- 
tion may  record  it  if  the  corporate  officials  see  fit,  but,  as  the 
minor  may  at  will  repudiate  the  whole  transaction,  the  trans- 
ferrer remains  liable. ^^  The  same  rule  holds  as  to  a  transfer 
to  a  person  known  to  be  insolvent,  the  transferrer  not  being 
relieved  from  liability.^^ 

A  transfer  to  an  agent,  attorney,  trustee,  guardian,  adminis- 
trator, or  executor  in  his  own  name,  followed  by  a  statement 
of  the  capacity  in  which  he  acts,  as  "James  H.  McLane, 


»  Rochester,  etc.,  Co.  v.  Roe,  7  App.  Div.  (N.  Y.)  3^6^  (1896) ;  Sprague  v.  Na- 
tional Bank,  172  111.  149  (1898);  42  L.   R.  A.  606. 

10  Cook  on  Corp.,  §§  250.  396. 

"  Foster  v.  Chase,  75  Fed.  Rep.  797  (1896) ;  Foster  v.  Wilson,  75  Fed.  Rep. 
797  (1896). 

"  Bowden  v.  Johnson,  107  U.  S.  25,1  (1882) ;  Rochester,  etc.,  Co.  v.  Raymond, 
158  N.  Y.  S76  (1899). 


RULES  REGULATING  TRANSFERS 


291 


Agent/'  renders  him  personally  liable  on  the  stock  so  held/^ 
except  where  expressly  exempted  by  statute.^*  The  same  is 
true  where  a  transfer  is  made  to  the  treasurer  of  a  corpora- 
tion in  his  own  name,  as  "Henry  James,  Treasurer."^^ 

A  transfer  to  two  persons,  as  "George  Howard  and  John 
Mackel,"  makes  them  tenants  in  common  and  each  may  be 
held  for  one-half  of  any  liability  on  such  stock  and  both  must 
join  in  a  trans fer.^^  A  transfer  to  a  firm,  however,  as  "How- 
ard &  Mackel,"  does  not  have  this  effect  but  creates  a  partner- 
ship holding  and  a  partnership  liability." 

A  transfer  to  an  existing  corporation  authorized  to  hold 
stock,  as  "The  Strathmore  Scale  Company,"  renders  the  as- 
signee corporation  liable  as  is  an  individual  on  the  stock  trans- 
ferred. A  transfer  to  a  membership  corporation  or  unorga- 
nized association,  as  "Grace  Methodist  Church"  or  the 
"Brooklyn  Decorators'  Union,"  is  of  doubtful  legality,  and,  if 
the  matter  of  liability  is  of  importance,  should  not  be  recorded 
by  the  corporation  until  the  right  of  the  body  to  hold  stock 
has  been  proved.  If  not  authorized  to  hold  stock,  it  cannot 
assume  the  liabilities  of  a  stockholder. 

A  transfer  to  a  dummy  stockholder,  as  in  case  of  trans- 
fer to  any  other  agent,  renders  the  dummy  liable  if  he  has 
property  sufficient  to  make  the  liability  effective.  ^^  The  party 
for  whom  the  dummy  is  acting  is,  however,  likewise  liable  as 
an  undisclosed  principal.^^  A  transfer  to  a  pledgee  in  his  own 
name  without  qualification  renders  him  liable.  It  is  otherwise, 
however,  if  the  nature  of  the  transfer  is  shown  by  its  form, 
as  "Howard  Fielding,  Pledgee. ^^ 

13  Wadsworth  v.  Laurie,  164  III.  42  (1896);  Winston  v,  Dorset  Pipe,  etc.,  Co..  139 
111.  64  (1889). 

"Davis  V.  Essex  Baptist  Society,  44  Conn.  582  (1877);  Lucas  v.  Coe,  86  Fed. 
Rep.  97a  (1898). 


^  2  Cook  on  Corp.,  §  724,  and  notes. 

"Markell  v.   Ray,  75  Minn.   1.38  (1898). 

"  Barton  National  Bank  ei  al.  v.  Atkins  et  at.,  72  Vt.  33  (1899). 


18  Dunn  V.   Howe,  107  Fed.    Rep.   849  (1901). 

"Pauly  V.  State,  etc.,  Co.,  165  U.  S.  606  (1897);  Davis  v.  Stevens,  71  Fed.  Cas. 
177  (1879)- 

»  Robinson  v.  Southern  National  Bank,  180  U.  S.  205  (1901) ;  Pauly  v.  State 
Loan  &  Trust  Co.,  165  U.  S.  606  (1897). 


292 


STOCK  RECORDS  AND  STOCK  TRANSFER 


§  266.     Form  of  Transfer 

A  general  form  of  assignment  for  stock  is  always  printed 
or  engraved  upon  the  back  of  each  stock  certificate.  (See 
Form  22.)  If  there  were  any  reason  therefor,  stock  might 
with  equal  effect  be  transferred  by  means  of  a  separate  assign- 
ment written  or  printed  and  attached  to  its  certificate.  In 
such  case  the  certificate  should  be  more  fully  described  and 
identified  than  is  the  case  in  the  usual  form  of  assignment. 

The  signature  to  the  assignment  of  a  stock  certificate  must 
correspond  exactly  with  the  name  on  the  face  of  the  certificate 
and  should  be  witnessed.  If  the  signature  of  the  transferrer  is 
entirely  unknown  to  the  transfer  ofiicer  or  agent,  it  should  be 
guaranteed  by  some  responsible  party  or  be  acknowledged  be- 
fore a  notary  public. 

If  the  party  signing  a  transfer  of  stock  acts  in  a  repre- 
sentative capacity,  a  description  of  the  capacity  in  which  he 
signs  should  be  added  to  the  signature,  as  "Howard  Fielding, 
Trustee  for  Jane  Hathaway."  If  a  certificate,  issued  in  her 
maiden  name,  is  to  be  transferred  by  a  married  woman,  the 
signature  should  be  in  the  following  form:  ''(^^^s.)  Alice 
H.  Walker,  formerly  Alice  H.  Ainsley."  Occasionally  a  mar- 
ried woman  holding  stock  in  her  maiden  name  wishes  it  trans- 
ferred to  the  name  acquired  by  marriage.  In  such  case  the 
signature  to  the  assignment  is  similar  to  that  just  given  and 
the  blank  for  the  name  of  the  transferee  is  filled  in  as  follows: 
"(Mrs.)  Alice  H.  Walker." 

The  name  of  the  transferee  should  be  written  in  the  proper 
blank  of  the  assignment  form  without  abbreviation,  compli- 
mentary title,  or  suffix,  though  where  the  transferee  is  a  wo- 
man, the  designatiom^"(Miss)"  or  "(Mrs.),"  as  the  case  may 
be,  is  frequently  and  properly  placed  before  the  name. 

When  a  transfer  of  stock  is  to  be  received  by  an  agent,  it 
should  be  made  out  in  the  name  of  his  principal,  unless  the 
agent  is  willing  to  assume  any  statutory  liability  on  the  stock 


RULES  REGULATING  TRANSFERS       293 

transferred.  When  stock  is  transferred  by  an  agent  or  one 
acting  for  another,  the  name  of  the  principal  should  be  ap- 
pended to  the  assignment  followed  by  the  agent's  name  and 
a  statement  of  the  capacity  in  which  he  signs;  thus,  "Frank 
H.  McClelland  by  Howard  James,  Attorney." 

§  267.     Transfers  to  and  by  Agents 

Any  person  competent  to  contract  and  wishing  to  transfer 
stock,  may  transfer  stock  or  receive  the  transfer  of  stock 
through  an  agent.  In  case  of  transfer,  the  agent  or  attorney 
in  fact  should  present  the  certificate  to  be  transferred,  accom- 
panied by  his  power  of  attorney  or  a  duly  acknowledged  copy 
thereof,  which  should  be  left  on  file  with  the  transfer  agent  or 
officer  of  the  corporation.  Express  authority  to  transfer  stock 
should  be  given  by  the  power  of  attorney  and,  if  necessary, 
evidence  should  be  furnished  that  the  signature  to  the  power 
is  genuine,  that  the  instrument  is  still  in  force,  and  that  the 
party  presenting  it  is  the  party  named  therein.^^ 

In  case  of  transfer  by  an  agent,  it  is  the  duty  of  the 
corporation  to  require  satisfactory  evidence  of  the  agent's 
authority.  Otherwise  in  case  of  a  fraudulent  transfer  the 
corporation  is  liable."^  The  .corporation  is  also  liable  if, 
with  knowledge  of  the  facts,  it  recognizes  a  power  of  at- 
torney executed  by  a  minor,  an  insane  person,  or  anyone 
else  unable  to  contract.  ^^ 

In  case  of  transfers  of  stock  to  an  agent,  the  certificates, 
as  stated,  should  be  issued  in  the  principal's  name,  the  agent 
merely  receiving  the  certificates  and  receipting  therefor  for 
account  of  his  principal. 

If  a  certificate  is  indorsed  in  blank  and  entrusted  to  an 
agent  and  the  agent  assigns  the  stock  fraudulently,  the  stock- 


»Tel.  Co.  V.  Davenport,  97  U.  S.  369  (i8;8);  Bayard  v.  Farmers',  etc.,  Bank, 
52  Pa.   St.  23a  (1866). 

"Tafft  V.  Presidio,  etc.,  R.  R.  Co.,  84  Gal.  131  (1890);  Tel.  Co.  v.  Davenport,  97 
U.   S.  369  (1878). 

"  Chew  &  Goldsborough  v.  Bank  of  Baltimore,  14  Md.  299  (1859). 


294         STOCK   RECORDS   AND    STOCK   TRANSFER 

holder  has  no  recourse  save  against  the  agent,  as  his  own  act 
made  it  possible  for  his  agent  to  perpetrate  the  fraud. ^*  The 
rule  is  different,  however,  if  the  agent  transfers  the  stock 
directly  into  his  own  name.  In  such  case,  if  the  corporation 
knew  of  the  agency,  it  is  liable,^^  and  the  original  owner  will 
not  be  estopped  from  reclaiming  the  stock. 

§  268.     Transfers  to  and  by  Executors  and  Administrators 

A  corporation  cannot  refuse  to  record  transfers  of  stock 
belonging  to  an  estate,  made  by  the  executor  or  administrator 
of  such  estate,  provided  the  proper  letters  testamentary  or 
letters  of  administration  are  presented  for  inspection.^®  A 
corporation  may  also  properly  require  that  a  certified  copy 
of  the  will,  if  any,  be  exhibited,  for  the  reason  that  it  has 
been  repeatedly  held  that  corporations  are  chargeable  with 
notice  of  the  contents  of  the  will.^^  Such  executor  or  admini- 
strator may  transfer  the  stock  directly  from  the  deceased 
party  to  a  purchaser,  or  may  transfer  the  stock  to  his  own 
name  as  administrator  or  executor, ^^  or  may  pledge  the  stock 
if  this  be  necessary.  The  corporation  should  not,  however, 
permit  him  to  transfer  the  stock  to  his  individual  name.^^ 
When  there  are  two  or  more  executors  of  an  estate,  one 
alone  may  not  transfer  stock;  all  must  join.^** 

Before  a  transfer  of  stock  by  an  executor  or  adminis- 
trator is  allowed,  a  certified  copy  of  the  appointment  of  the 
party  acting  should  be  filed  with  the  corporation.  Or  in  case 
there  is  a  will,  a  certified  copy  of  this  instrument  should  be 
presented  for  inspection. 


"P.    R.   R.   Co.'s  Appeal,  86  Pa.   St.  80  (1878);  Elliott  v.   Miller  &  Co.,   158  Fed. 
sea  (1908). 

»Tafft  V.  Presidio,  etc.,  R.   R.   Co.,  84  Cal.   131   (1890). 

*  Bayard  v.   Farmers'  etc..  Bank,  52  Pa.   St.  232  (1866). 

"  Wooten  V.    Railroad,   128  N.    C.    119  (1901);   Marbury,  Trustee  v.    Ehlen,   ^^  Md. 
206   (1890). 

•London,  Paris  &  Am.  Bank  v.  Aronstein,  117  Fed.  Rep.  601  (1902). 

*  I  Cook  on  Corp.,  §  329;  London,  Paris  &  Am.  Bank  v.  Aronstein,  117V  Fed.  Rep. 
601  (1903);  Chester  Co.,  etc.,  Co.  v.  Securities  Co.,  165  App.  Div.   (N.  Y.)  3^9  (1914)- 

*>Bohlen's   Estate,   75   Pa,   St.  304   (1874);  Tunis  v.   Pass.   R.   R.   Co.,   149  Pa.    St. 
TO   (1892);   10  Cyc,  p.  594, 


RULES    REGULATING   TRANSFERS 


^95 


Corporate  officials  recording  transfers  of  executors  or 
administrators  with  knowledge  that  a  fraud  or  breach  of 
official  duty  is  involved  therein,  are  liable  to  the  estate.  An 
administrator  or  executor  cannot  compel  the  transfer  of  stock 
belonging  to  the  estate  when  the  corporation  is  domiciled  in 
another  state.  A  purchaser  of  stock  from  such  an  adminis- 
trator or  executor  can,  however,  compel  the  corporation  to 
recognize  his  right  of  property  in  the  purchased  stock  and  to 
issue  to  him  new  certificates. 

When  a  trust  discharged  by  an  executor  or  administrator 
continues  for  a  long  period,  the  executor  or  administrator 
becomes  in  fact  a  trustee  and  his  transfers  then  become  sub- 
ject to  the  rules  governing  trustees.^^  The  corporation  must 
then  refuse  the  transfer  of  stock  unless  the  executor  or  ad- 
ministrator brings  satisfactory  evidence  of  his  right  to  make 
such  transfer. 

§  269.     Transfers  to  and  by  Trustees 

The  corporate  officials  must  refuse  the  transfers  of  a 
trustee  unless  his  authority  is  clearly  established.  His  ap- 
pointment must  be  in  writing  and  expressly  authorize  the  sale 
or  transfer  of  stock.  If  such  instrument  exists  in  due  form, 
the  trustee  may  compel  transfers  by  the  corporation  when 
the  certificates  of  stock  are  duly  assigned  by  him  in  his  rep- 
resentative capacity.  ^^ 

The  corporation  is  responsible  if  it  permits  any  transfer 
by  a  trustee  not  authorized  by  the  trust  instrument. ^^  If  there 
is  more  than  one  trustee,  all  must  sign  the  transfer,^*  which 
should  be  accompanied  by  a  properly  certified  copy  of  the 
instrument  of  trust  establishing  clearly  the  authority  of  the 


31  Peck  V.  Bank,  16  R.  I.  710  (1890) :  2  Cook  on  Corp.,  §  598. 

"Bird  V.   Chicago,  etc.,  R.  R.,  137  Mass.  428  (1884). 

33Marbury,  Trustee,  v.  Ehlen  et  al.,  72  Md.  206  (1890);  Geyser-Marion  Gold-Min. 
Co.  V.  Stark,  106  Fed.   Rep.  5.58  (1901).  ^  „    .-       o^  t     t. 

"Bohlen's  Estate,  75  Pa.  St.  304,  312  (1874);  Oliver  v.  Governor  &  Co.,  86  L.  1. 
Rep.  248  (is^txz). 


296    STOCK  RECORDS  AND  STOCK  TRANSFER 

trustees  to  make  such  transfer.  Trustees  appointed  by  court 
should  show  a  copy  of  the  court  appointment. 

Before  stock  is  purchased  from  a  trustee — provided  the 
certificates  of  stock  indicate  that  he  is  a  trustee — the  pur- 
chaser should  ascertain  whether  the  trustee  is  authorized  to 
make  the  sale.^^  '*A  certificate  for  shares  of  stock  running 
to  'A.  B.,  Trustee,'  or  to  *A.  B.  in  trust,'  without  disclosing 
the  names  of  the  beneficiaries  or  the  particulars  of  the  trust,  is 
notice  to  a  purchaser  of  shares  that  *A.  B.'  does  not  hold  them 
in  his  own  right,  but  as  a  trustee."^® 

When  transfers  are  made  to  a  trustee,  his  representative 
capacity  should  be  clearly  indicated  by  reference  in  the  cer- 
tificate to  the  will  or  other  instrument  under  which  the  trustee^ 
ship  was  created,^^  and  the  name  of  the  beneficiary  should 
be  mentioned  when  possible;  thus,  "John  Hayden,  Trustee 
for  Howard  Waller  under  the  will  of  Horace  Waller." 

§  270.     Transfers  to  and  by  Minors 

A  corporation  may  refuse  to  transfer  stock  to  a  minor 
as  he  is  incapable  of  assuming  the  obligations  of  a  stock- 
holder.^^ In  case  such  a  transfer  is  made,  the  liability  of 
the  transferrer  as  a  stockholder  of  the  corporation  continues 
until  the  minor  becomes  of  age  and  ratifies  the  transfer.^^ 
Minors  may  receive  and  hold  stock  in  their  own  names  but 
cannot  transfer  stock  so  held.  Assignments  should  therefore 
be  made  to  their  guardians  in  the  following  form:  "Alfred 
Carr  (minor)  under  guardianship  of  Henry  B.  Boerum." 

A  minor  is  himself  unable  to  make  a  legal  transfer  of 
stock  even  though  the  stock  is  held  in  his  name,  and  the 
corporation  renders  itself  liable  for  any  resulting  damages  if 


«*  First  National   Bank  v.    National   Broadway  Bank,   is^  N.   Y.   459   (1898);   Shaw 
Spencer  et  al.,  100  Mass.  382  (1868). 
8«  Gerard  v.  McCormick    130  N.  Y.  261   (1891). 
^  Geyser-Marion  Gold-Min.  Co.  v.  Stark,  106  Fed.  Rep.  558  (1901). 
^2  Cook  on  Corp.,  §  396. 
»» Foster  v.  Wilson  et  al.,  75.  Fed.  Rep.  797  (1896). 


RULES  REGULATING  TRANSFERS        207 

it  records  such  transfer.  The  only  legal  method  of  transfer- 
ing  a  minor's  stock  is  therefore  by  assignment  executed  by  a 
duly  appointed  guardian/" 

§  271.     Transfers  to  and  by  Guardians 

Certificates  for  stock  owned  by  minors  or  other  persons 
not  competent  to  contract  should  properly  be  issued  in  the 
name  of  the  trustee  or  guardian  of  such  person.  In  most 
states  parties  not  competent  to  contract  cannot  transfer  stock 
and  therefore  all  transfers  of  stock  belonging  to  such  per- 
sons jnust  be  made  by  their  legally  appointed  trustees  or 
guardians. 

Usually  the  statutes  require  the  guardian  of  a  minor  to 
be  specially  authorized  by  order  of  a  proper  court  before 
he  may  sell  stock  belonging  to  his  ward,  and  the  corporation 
cannot  safely  record  a  transfer  of  a  minor's  stock  though  made 
by  his  guardian  until  it  ascertains  the  existence  of  such  author- 
ity." The  guardian  should  therefore  secure  proper  authority 
and  file  a  certified  copy  thereof  with  the  secretary  of  the 
corporation  before  or  at  the  time  the  transfer  is  made. 

When  no  statutes  regulate  the  sale  of  stock  by  guardians, 
a  guardian  may  freely  transfer  stock  without  any  special  court 
authorization,*^  though  in  this  case  it  is  safer  for  him  to 
obtain  authority  from  the  court  as  a  measure  of  self  protec- 
tion.   A  guardian  has  no  authority  to  pledge  stock. *^ 

§  272.     Transfers  to  and  by  Corporations 

Under  the  common  law,  one  corporation  cannot  hold  stock 
in  another.**  In  a  number  of  states,  however,  corporations 
are  by  statute  expressly  authorized  to  hold  stock  of  other 

« Smith  V.  Baker,  42  Hun  (N.  Y.)  504  (1886);  White  v.  New  Bedford,  etc., 
Corp.,   178  Mass.  20  (1901). 

"  Atkinson  v.  Atkinson,  90  Mass.  15  (1864-) ;  O'Herron  v.  Gray,  168  Mass.  573, 
(189?). 

*2  Lamar  v.   Micou,   112  U.    S.  452  (1884). 


*'  O'Herron  v.   Gray,   168  Mass.   573  (1897) 
**  People  V.    Chicago    Gas    Trust    Co.,    ] 
German  Savings  Inst.,   175  U.  S.  40  (1899). 


*4  People  V.    Chicago    Gas   Trust   Co.,    13a  111.   268  (1889);   De   La   Vergne   Co.   v. 


298    STOCK  RECORDS  AND  STOCK  TRANSFER 

corporations,  or  may  be  so  authorized  by  inclusion  of  the 
power  in  their  charters.  Even  where  this  is  not  the  case, 
the  general  rule  has  been  relaxed,  and  it  may  now  be  said 
in  general  that  a  corporation  may  become  a  stockholder  in 
another  corporation  wherever  the  stock  is  acquired  in  pur- 
suance of  a  legitimate  purpose  of  its  creation/^  Hence  an 
investment  company,  an  insurance  company,  a  trust  company, 
and  others  of  similar  character,  may  properly  invest  in  and 
hold  the  stock  of  other  corporations.  Also  corporations  may 
acquire  stock  by  foreclosure  proceedings  or  may  take  it  in 
order  to  escape  loss,  as  for  instance,  in  settlement  of  a  debt.'^^ 
Also  the  so-called  ''holding"  corporations  are  not  uncommon 
in  the  present  day,  which  are  expressly  authorized  to  hold 
stock  in  other  corporations  and  have  been  organized  for  this 
purpose. 

In  all  cases  where  the  corporation  properly  holds  stock, 
it  has  all  the  rights  of  a  stockholder  as  to  such  stock,  in- 
cluding the  right  to  receive  dividends  and  to  have  its  repre- 
sentatives vote  and,  when  duly  elected,  act  as  directors  or 
officers  of  the  corporation  by  which  the  stock  was  issued.'*^ 

As  a  rule  a  corporation  may  buy  its  own  stock  with  its 
surplus  profits,  if  not  prohibited  by  statute  and  all  its  stock- 
holders acquiesce.^^  It  may  not,  however,  do  so  except  from 
surplus  profits — unless  expressly  authorized  thereto  by 
statute — since  such  procedure  impairs  and  practically  amounts 
to  an  illegal  reduction  of  its  capital  stock.'*^ 

Transfers  of  stock  held  by  associations,  societies,  or  cor- 
porations must  be  made  under  the  corporate  seal  by  the  duly 
authorized  officers,  and  must  be  accompanied  by  a  properly 


*«  Booth  V.  Robinson,  c;5  Md.  419  (1880) ;  Layng  v.  A.  French  Spring  Co.,  149 
Pa.   St.  308  (1892). 

*8  Robotham  v.  Prudential  Ins.  Co.,  53  Atl.   Rep.   (N.  J.)  842  (1903)- 

*7  Camden,  etc.,  R.  R.  Co.  v.  Elkins,  37  N.  J.  Eq.  273  (1883);  Rogers  v,  Nash- 
ville, etc.,  Ry.  Co.,  91  Fed.  Rep.  299  (185^);  Windmuller  v.  Standard  Distilling,  etc., 
Co.,  1,14  Fed.  Rep.  491  (1902);  Oelbermann  v.  New  York,  etc.,  R.  Co.,  77  Hun  332 
(1894). 

**  See  I  Cook  on  Corp.,  §311;  Lowe  v.  Pioneer  Threshing  Co.,  70  Fed.  Rep.  646 
(1895). 

*»McGill  V.  Underwood,  161  App.  Div.   (N.   Y.)  30,  32  (1914). 


RULES    REGULATING   TRANSFERS  299 

certified  copy  of  the  resolution  or  by-law  authorizing  the 
transfer.  The  certificate  of  authority  should  include  a  desig- 
nation and  statement  of  the  due  election  of  the  officers  who 
are  to  act.  Occasionally  transfer  agents  or  officers  require 
an  exemplified  copy  of  the  minutes  or  by-laws  of  the  organiza- 
tion before  they  will  register  such  a  transfer.      (See  Form 

179.) 

When  stock  is  acquired  by  an  association  or  society  not 
incorporated,  it  is  usually  placed  in  the  hands  of  trustees. 

When  stock  of  another  corporation  is  acquired  by  a  cor- 
poration authorized  to  hold  such  stock,  the  assignment  may 
run  direct  to  the  corporation  or  to  its  treasurer  or  to  a  trustee 
for  the  corporation,  though  if  the  stock  actually  and  unre- 
servedly belongs  to  the  corporation,  there  is  no  reason  why 
it  should  not  be  held  in  the  corporate  name.  The  certificates 
for  such  stock,  assigned  in  blank  or  assigned  direct  to  the 
corporation — or  the  treasurer  or  a  trustee  if  desired — are 
turned  over  to  the  treasurer  or  other  designated  officer  of 
the  transferee  corporation,  who  presents  the  certificates  for 
reissue,  the  new  certificates  being  taken  in  the  name  of  the 
transferee  as  indicated  by  the  completed  assignments  on  the 
back  of  the  certificates. 

When  such  stock  is  held  in  the  corporate  name  and  is 
to  be  transferred,  the  corporate  signature  is  affixed  to  the 
assignment  by  the  duly  authorized  officer  or  officers  of  the 
assigning  corporation.  The  corporation  which  issued  the 
stock,  before  registering  the  transfer  on  its  books  may  and 
should  require  proper  evidence  that  these  officers  were  prop- 
erly empowered  to  affix  the  corporate  signature.  This  proof 
is  best  supplied  in  the  form  of  a  certified  copy  of  the  reso- 
lution whereby  the  transfer  of  the  stock  was  authorized. 

The  procedure  is  much  the  same  where  stock  is  held  in 
the  name  of  the  treasurer  or  a  trustee  for  the  corporation, 
save  as  to  the  signature  to  the  assignment. 


300    STOCK  RECORDS  AND  STOCK  TRANSFER 

§  273.     Transfers  to  and  by  Partnerships 

A  partnership  may  deal  in  stock  as  freely  as  may  individu- 
als, and  if  it  is  a  trading  partnership,  i.e.,  a  partnership  formed 
for  the  purpose  of  buying,  selling,  or  manufacturing,^*'  any 
member  of  the  firm  may  sign  the  partnership  name  to  a 
transfer  of  stock  if  this  stock  is  held  in  the  firm  name.^^ 

The  signatures  of  the  individual  partners  to  the  assign- 
ment are  not  necessary,  the  firm  name  affixed  by  one  of  the 
partners  being  legally  sufficient.  The  corporation  may  re- 
quire evidence  when  necessary  of  the  assigning  partner's  mem- 
bership in  the  firm. 

If  stock  is  issued  to  the  partners  as  individuals,  as  "To 
John  Gray  and  Henry  H.  Harriman,"  they  are  tenants  in 
common  and  both  the  individuals  named  must  join  in  any 
transfer.  The  same  is  true  when  the  stock  is  held  in  the 
firm  name  if  the  partnership  is  not  a  trading  partnership. 
Thus,  if  stock  is  held  by  a  professional  firm,  even  though  in 
the  firm  name,  the  partners  must  sign  their  individual  names 
to  the  transfer.  In  the  absence  of  objection,  any  partner 
may  vote  on  stock  held  in  the  firm  name  but  in  case  of  disa- 
greement the  stock  cannot  be  voted. ^^ 

One  joint  owner  cannot  sell  or  vote  stock  standing  in  the 
names  of  two  or  more,  but  each  name  must  be  signed  to  its 
assignment  or  proxy.^^ 

§  274.     Summary  of  Rules  Regulating  Transfers 

The  following  rules  regulating  transfers  of  stock  are 
those  recognized  by  the  trust  companies  of  New  York  City 
and  are  given  here  as  a  very  clear,  concise  summary  of  the 
general  laws  governing  the  subject. 

I.  The  assignment  of  a  certificate  should  be  executed  by 


«>Lee  V.  Bank,  45  Kan.  8  (1890);  ti  L.   R.  A.  238. 

"  Comstock  V.   Buchanan,  57  Barb.,   127   (1864). 

"Matter  of  Pioneer  Paper  Co.,  :^  How.   Pr.   in    (1865). 

"Tunis  V.   R.  R.  Co.,  149  Pa.   St.  70  (1892);  s.  c,  15  L.  R.  A.  66su 


RULES    REGULATING   TRANSFERS  301 

the  stockholder  personally  or  by  duly  authorized  attorney. 
In  the  latter  case  the  assigned  certificate  should  be  presented 
to  the  transfer  officials  accompanied  by  the  power  of  attorney 
under  which  the  party  acts,  and  the  original  or  a  notarial 
copy  of  this  power  should  be  left  on  file.  Authority  to  trans- 
fer stock  should  appear  in  the  power  of  attorney  and,  if  neces- 
sary, the  authenticity  of  the  signature  and  the  fact  that  the 
instrument  is  still  in  force  must  be  proved. 

2.  The  signature  must  be  witnessed  and  must  correspond 
with  the  name  as  written  on  the  face  of  the  certificate.  Signa- 
tures unknown  to  the  transfer  agent  should  be  guaranteed  by 
some  bank  official  or  acknowledged  before  a  notary  public. 

3.  The  name  and  full  post-office  address  of  the  trans- 
feree should  be  given  in  full  without  abbreviation  of  any 
kind.  The  space  for  the  name  of  the  attorney  should  be 
left  blank.  (The  address  of  the  transferee  is  not  entered  in 
the  assignment  form  but  may  be  noted  on  the  certificate  or  be 
furnished  on  a  slip  attached  to  the  certificate.) 

4.  The  full  first  name  of  the  transferee  should  be  given. 
If  the  transferee  is  a  woman,  the  prefix  "Mrs."  or  "Miss" 
should  be  used.  No  other  prefixes  and  no  suffixes  should  be 
used. 

5.  In  transferring  to  a  married  woman,  use  her  full 
Christian  name — not  that  of  her  husband. 

6.  In  case  a  new  certificate  is  required  because  of  change 
of  name  by  marriage,  the  old  certificate  should  be  signed 
"(Mrs.)  Henrietta  F.  Bowen,  formerly  (Miss)  Henrietta  F. 
Francisco,"  while  in  the  space  for  the  name  of  transferee 
should  be  placed  the  name  "(Mrs.)    Henrietta  F.   Bowen." 

7.  Agents,  attorneys,  executors,  administrators,  guardians, 
or  trustees  should  not  transfer  stock  to  themselves  directly, 
i.e.  as  individuals. 

8.  Transfers  to  a  minor  should  give  the  guardian's  name; 
thus,  "Frederick  McAllison  (a  minor)  under  guardianship  of 


302 


STOCK  RECORDS  AND  STOCK  TRANSFER 


John  J.  McCall."  Transfers  to  minors  should  be  avoided 
if  possible.  Transfers  from  a  minor  can  be  made  only  by 
a  guardian  appointed  by  the  proper  court,  who  must  exhibit 
a  duly  certified  copy  of  appointment. 

9.  A  transfer  by  an  administrator  must  be  within  his 
authority  as  evidenced  by  a  copy  of  his  appointment  certified 
by  the  proper  probate  authorities. 

10.  A  transfer  by  an  executor  must  be  accompanied  by  a 
copy  of  the  will  and  certificate  of  appointment,  both  certified 
by  the  proper  probate  authorities.  The  copy  of  the  will  is 
returned  after  inspection  by  transfer  agent. 

11.  Transfers  should  not  be  made  to  a  trustee,  agent, 
or  attorney  who  is  not  appointed  by  an  instrument  in  writ- 
ing. If  properly  appointed,  the  transfer  must  describe  the 
trust  by  reference  to  the  will  or  other  instrument  under  which 
it  is  created. 

12.  In  transfers  by  trustees — when  more  than  one — all 
must  sign  and  the  transfer  must  be  accompanied  by  a  properly 
certified  copy  of  the  instrument  which  authorizes  the  trustees 
to  sell  or  transfer  such  stock. 

13.  In  transferring  to  a  society  or  institution,  evidence 
should  be  required,  if  necessary,  that  it  has  power  to  hold 
and  transfer  stock. 

14.  Transfers  by  associations,  societies,  or  corporations 
must  be  executed  by  duly  authorized  officers  under  seal  of  the 
organization,  and  must  be  accompanied  by  a  certified  copy  of 
the  authorizing  resolution  or  by-law. 

The  regulations  also  prescribe  generally  that  prompt  notice 
of  any  change  of  address  of  a  stockholder,  stating  the  com- 
pany in  which  the  stock  is  held,  should  be  sent  to  the  transfer 
agent  for  record,  and  that  lost  certificates  should  be  reported 
to  the  transfer  agent  as  soon  as  the  loss  is  discovered,  with 
full  description  of  the  missing  certificate, 


CHAPTER    XXXVIII 
STOCK  TRANSFER  TAX 

§  275.     General 

New  York  State  was  the  first  state  to  impose  a  stock 
transfer  tax,^  and  has  been  followed  by  Pennsylvania^  and 
Massachusetts.^  In  the  three  states  the  acts  imposing  the  tax 
and  the  regulations  for  their  enforcement  are  substantially 
uniform.  Under  each  act  transfers  of  stock  of  all  domestic 
corporations  and  of  all  foreign  corporations  having  transfer 
agencies  within  the  state  are  taxable.  Many  corporations  of 
other  states  have  transfer  offices  in  New  York,  Boston,  or 
Philadelphia.  For  this  reason  and  for  the  further  reason 
that  other  states  may  be  expected  to  adopt  similar  legislation, 
it  seems  not  out  of  place  to  summarize  the  laws  and  regulations 
in  connection  with  the  general  topic  of  stock  transfer. 

§  276.     Duties  and  Penalties 

The  tax,  which  is  a  stamp  tax  of  2  cents  on  each  $100 
of  face  value  or  fraction  thereof,  is  imposed  on  every  sale 
or  transfer  of  stock  within  the  state,  whether  the  corpora- 
tion is  domestic  or  foreign.  Where  the  shares  of  stock  are 
issued  without  designated  monetary  value,  the  tax  is  imposed 
at  the  rate  of  2  cents  for  each  share.  The  tax  is  payable  by 
the  person  making  the  sale. 

The  duties  of  the  corporation  are  to  see  that  the  proper 
stamps  are  attached  and  cancelled  before  transferring  the 


IN.  Y.,  L,   1905,  Ch.  241. 

«Pa.,  Act  of  June  4,  1915^  P.   L.  8 

*  Mass.,   Gen.   Acts,   1915,   Ch.   238. 


303 


304        'STOCK   RECORDS   AND    STOCK   TRANSFER 

stock  on  the  books  of  the  company,  to  keep  a  record  of  trans- 
fers in  such  form  as  may  be  required,  and  to  file  with  the 
proper  officers  a  certificate  showing  the  state  of  incorporation 
and  the  corporation's  transfer  office  within  the  state.  A  fail- 
ure to  perform  any  of  these  duties  is  a  misdemeanor,  and 
heavy  penalties  are  imposed. 

§  277.     General  Rulings 

Practically  identical  sets  of  rulings  governing  the  collec- 
tion of  the  tax  have  been  adopted  in  each  state.  These  rulings 
are  in  substance  as  follows: 

1.  The  statute  does  not  apply  to  the  original  issue  of 
stock. 

2.  The  transfer  to  and  from  voting  trustees  is  taxable, 
also  the  transfer  of  voting  trust  certificates. 

3.  The  mere  surrender  of  a  certificate  of  stock  for  re- 
issue in  smaller  denominations  is  not  taxable;  but  if  reissued 
in  part  to  the  original  owner  and  in  part  to  a  third  party,  it 
is  taxable  to  the  extent  of  the  transfer  to  the  third  party. 

4.  Likewise  the  mere  surrender  of  a  certificate  of  stock 
held  by  a  deceased  person  for  issuance  in  the  name  of  his 
executor  or  administrator  is  not  taxable;  but  all  transfers 
made  by  the  latter,  whether  to  trustees,  legatees,  or  other 
persons,  are  taxable. 

5.  While  the  law  has  no  extra-territorial  operation,  never- 
theless where  it  appears  that  the  transfer  of  the  stock  on  the 
corporate  books  within  the  state  is  essential  to  render  the 
transfer  effectual,  it  subjects  it  to  a  tax  although  in  all  other 
respects  made  without  the  state. 

6.  It  is  the  duty  of  the  person  making  or  effectuating 
the  sale  or  transfer  to  pay  the  required  tax  by  procuring, 
affixing,  and  cancelling  the  stamps,  except  that  where  a  sale 
or  transfer  is  shown  only  by  the  books  of  the  corporation, 


STOCK    TRANSFER   TAX  ^05 

the  person  making  the  sale  must  secure,  and  the  corporation 
affix,  the  stamps  to  its  books  and  cancel  them. 

7.  Where  the  sale  or  transfer  is  effected  by  the  delivery 
or  transfer  of  a  certificate,  the  stamp  must  be  placed  upon  the 
surrendered  certificate. 

8.  Under  no  circumstances  may  a  stamp  erroneously  at- 
tached to  a  certificate  or  memorandum  be  removed. 

Other  rulings  dealing  with  the  form  of  records  to  be 
kept  and  like  matters  vary  slightly  in  each  state. 


Part  IX — Meetings  and  Records 


CHAPTER   XXXIX 

ANNUAL  MEETING  OF  STOCKHOLDERS 

§  278.     The  Annual  Meeting 

The  annual  meeting  of  stockholders  is  prescribed  by  stat- 
ute in  most  states,  and  elsewhere  is  required  by  the  charter 
or  by-laws  of  the  corporation.  It  is  the  only  usual  regular 
meeting  of  stockholders.  If  other  meetings  are  necessary, 
they  are  "special  meetings'*  and  called  as  required. 

Stockholders'  meetings  must  be  held  within  the  state  of 
incorporation.  In  many  states  the  statutes  so  provide.  Else- 
where it  is  a  matter  of  common  law,^  save  in  some  few  in- 
stances, as  in  Delaware,  West  Virginia,  and  South  Dakota, 
where  the  statutes  expressly  provide  that  stockholders'  meet- 
ings may  be  held  out  of  the  state.  The  principal  office  of 
the  company  within  the  state  is  the  customary  and  most  ap- 
propriate place  for  stockholders'  meetings  and  in  many  states 
is  the  place  designated  by  statute. 

The  by-laws  usually  prescribe  the  details  of  the  annual 
meeting,  such  as  the  time  and  place,  the  notice  required,  the 
number  necessary  to  constitute  a  quorum,  the  time  of  closing 
books,  the  officers  of  the  meeting,  and  the  order  of  business. 
By-law  provisions  also  usually  regulate  the  use  of  proxies, 
method  of  casting  votes,  and  the  employment  of  inspectors 
or  tellers  at  elections  of  directors. 


*Onnsby  v.  Vermont  Mining  Co.,  56  N.  Y.  623  (1874). 

306 


ANNUAL    MEETING    OF   STOCKHOLDERS  307 

Whenever  there  is  any  probability  of  the  proceedings  of 
the  annual  meeting  being  attacked,  or  when  there  are  any 
disputes  or  differences  of  opinion  among  the  stockholders  of 
a  corporation,  every  formality  in  connection  with  the  annual 
meeting  should  be  carefully  observed.  Under  other  circum- 
stances such  close  observance,  though  always  advisable,  is 
not  so  essential.  If  the  proceedings  are  characterized  by  good 
faith  and  are  a  fair  expression  of  the  sense  of  those  present, 
"mere  irregularities  in  the  manner  of  conducting  the  business 
are  immaterial."  ^ 

§  279.     Closing  Transfer  Books 

The  corporate  calendar  (Form  197)  should  show  the  exact 
date  prior  to  the  annual  meeting  on  which  the  transfer  books 
are  to  be  closed  to  transfers.  The  object  of  thus  closing 
the  books  is  to  obviate  any  uncertainty  as  to  who  is  entitled 
to  receive  notice  of  and  to  vote  at  the  annual  meeting. 

§  280.     Notice  of  Annual  Meeting 

Notice  of  the  annual  meeting  is  usually  prescribed  by  the 
by-laws  and  in  some  few  states  is  required  by  statute.  Such 
notice  is  not,  however,  of  the  same  vital  importance  as  in  the 
case  of  special  meetings,  since  the  time  and  place  of  the  annual 
meeting  are  specified  in  the  by-laws  and  are  supposed  to  be 
familiar  to  the  stockholders.  For  this  reason,  failure  to  send 
out  notice  of  its  time  and  place  as  required  by  the  by-laws, 
while  a  very  serious  breach  of  duty  on  the  part  of  the  secre- 
tary, is  not  ordinarily  held  to  invalidate  the  proceedings  of 
the  meeting,  save  as  to  any  unusual  or  specially  important 
business  considered  thereat.^  Where  notice  is  prescribed  by 
statute,  however,  the  provision  of  the  statute  must  be  com- 
plied with  unless  waived  by  all  the  stockholders. 


'  2  Cook  on  Corp.,   §  606.  j,„ 

»Morawetz,   §482;  Warner  v.   Mower,   11  Vt.   3S5  (18.19) ;   Sampson  v.   Steam  Mill, 
36  Mc,  78  (1853);  Morrill  v.  Little  Falls  Mfg.  Co.,  53  Minn.  371   (1893). 


3o8 


MEETINGS   AND    RECORDS 


The  notice  of  the  annual  meeting  should  specify  not  only 
its  time  and  place  but  also  its  objects.  This  is  not  always 
legally  necessary  but  is  an  advisable  precaution,  particularly 
when  business  of  special  importance  is  to  be  considered 
thereat.  "Where  unusual  business  is  to  be  transacted,  even 
at  a  regular  meeting,  the  notice  of  that  meeting  should  state 
the  unusual  business.''  *  In  Pennsylvania  it  has  even  been  held 
that  important  amendments  of  the  by-laws  cannot  be  legally 
effected  at  the  annual  meeting  unless  previously  notified  to 
the  stockholders.^  In  the  larger  corporations  the  by-laws 
frequently  provide  specifically  that  any  failure  or  irregularity 
in  the  notice  of  the  annual  meeting  shall  not  affect  its  validity 
or  the  validity  of  any  of  its  proceedings. 

Written  notice  of  the  annual  meeting  mailed  to  the  stock- 
holders of  record  is  usually  prescribed.  This  notice  should 
be  signed  with  the  official  signature  of  the  secretary  or  other 
corporate  ofificer  authorized  thereto,^  and  should  be  mailed, 
postage  paid,  on  the  date  specified  in  the  by-laws — which 
ranges  widely  from  5  to  60  days  or  more  before  the  date  of 
the  meeting — to  the  address  of  each  stockholder  as  shown 
by  the  books  of  the  company.  A  copy  of  the  notice  with  date 
of  sending  indorsed  thereon,  should  be  preserved  by  the  secre- 
tary as  evidence  that  proper  notice  of  the  meeting  has  been 
given. 

Publication  of  the  notice  of  an  annual  meeting  is  in  some 
states  required  by  statute,  and  in  all  states  is  customary 
among  the  larger  corporations.  It  is,  however,  a  most  un- 
certain and'  inadequate  method  of  notification  and  should 
be  used  only  in  connection  with  notice  by  mail.  Copies  of 
the  papers  in  which  the  publication  notice  appears  should  be 
preserved  by  the  secretary  as  proof  of  due  publication,  or, 
if  preferred,  a  "copy  of  the  notice  may  be  made  and  an  affi- 

*  a  Cook  on  Corp.,  §  595. 

6  Bagley  v.  Reno,  201  Pa.  St.  78  (1902). 

'Johnston  V.  Jones,  23  N.  J.  Eq.  216  (1S72). 


ANNUAL    MEETING   OF    STOCKHOLDERS  309 

davit  of  the  publisher  or  of  the  secretary  certifying  to  its  due 
publication  be  attached.     (See  Forms  64-66.) 

The  notice  of  the  annual  meeting  usually  states  the  dates 
for  the  closing  and  reopening  of  the  transfer  books. 

§  281.     Preparations  for  Annual  Meeting 

It  is  the  secretary's  duty  to  see  that  all  stationery,  blanks, 
and  materials  and  any  of  the  corporate  books  or  documents 
in  his  keeping  that  may  be  needed  at  the  meeting,  are  at  hand 
or  readily  accessible  at  the  proper  time.  His  preparations  will 
also  usually  include: 

1.  Order  of  Business.  Unless  the  presiding  officer  is 
very  familiar  with  the  regular  order  of  business  as  given  in 
the  by-laws  of  the  company,  a  copy  should  be  prepared  by 
the  secretary  in  convenient  form  for  reference  and  be  handed 
to  the  chairman  at  or  before  the  time  he  takes  charge  of  the 
meeting.     (See  Form  7,  Art.  II.) 

The  object  of  the  formal  order  of  business  is  to  insure 
the  systematic  and  orderly  conduct  of  meetings  and  of  the 
business  of  such  meetings.  The  order  prescribed  is,  how- 
ever, directory,  not  mandatory  as  are  most  of  the  by-law  regu- 
lations, and  may  therefore  be  suspended  at  any  meeting  in 
whole  or  in  part,  either  by  a  majority  vote  of  those  present 
or  by  their  mere  assent.^ 

2.  List  of  Stockholders.  Under  the  laws  of  New  Jer- 
sey and  some  other  states,  an  alphabetical  list  of  the  stock- 
holders entitled  to  vote  at  the  annual  meeting  must  be  pre- 
pared by  the  secretary,  be  presented  at  the  meeting,  and  be 
kept  there  for  the  inspection  of  any  stockholder.  The  re- 
quirement is  a  reasonable  one,  and  a  similar  list  will  be  found 
a  convenience  in  any  state.  Its  preparation  is  frequently 
made  a  by-law  requirement. 


7  Matter  of  Wheeler,    2   Abb.    Pr.    (N.    S.)    361    (1866);   Matter   of   Mohawk,    etc., 
R.  R.  Co.,  19  Wend.   133  (1838). 


310 


MEETINGS   AND    RECORDS 


This  list  of  stockholders  is  made  out  from  the  stock 
books  after  they  are  closed  to  transfers,  and  gives  the  names 
and  addresses  of  the  stockholders  and  the  amount  of  stock 
held  by  each.  It  must  be  remembered,  however,  that  the 
company's  stock  books  are  the  final  authority  in  any  such 
matters  and  should  be  at  hand  for  reference  in  case  the  accu- 
racy of  the  list  is  impugned/ 

In  the  smaller  corporations  the  secretary  will  in  addition 
find  an  alphabetical  list  of  the  stockholders  of  much  conven- 
ience for  his  own  use.  This  list  should  be  arranged  with 
columns  in  which  may  be  noted  those  present  in  person  or  by 
proxy,  those  absent,  and  the  amount  of  stock  held  by  each. 
(See  Form  103.) 

3.  Outline  Minutes.  These  will  be  found  convenient  for 
the  use  of  the  secretary.  Properly  prepared,  they  cover  all 
routine  business  so  that  a  few  short  pencil  notes  will  usually 
dispose  of  these  matters,  leaving  the  secretary  free  to  attend 
to  any  new  or  special  business  that  may  demand  his  services. 
(See  Form  104.) 

§  282.     Officers  of  Meetings 

No  fixed  rule  prevails  as  to  officers  of  stockholders'  meet- 
ings. The  regular  officers  of  the  company  usually  serve,  but 
not  unless  authorized  thereto  by  the  charter  or  by-laws.  If 
no  such  provision  exists,  the  stockholders  elect  or  appoint 
the  officers  of  their  own  meetings.  As  a  rule,  the  secretary  so 
appointed  should  be  the  secretary  of  the  company.  To  appoint 
a  secretary  not  familiar  with  the  records,  the  personnel,  and 
the  general  condition  of  the  company,  is  apt  to  cause  delay  and 
confusion  and  is  but  seldom  advisable. 

When  the  regular  officers  are  designated,  the  president 
will  take  charge  of  the  meeting  as  a  matter  of  course,  or 


8  Johnston  v.  Jones,  23  N.  J.   Eq.  216  (1872);  Downing  v.   Potts,  23.  N.  J.   L.  66 


ANNUAL  MEETING  OF  STOCKHOLDERS 


311 


in  his  absence  the  vice-president  takes  the  chair.  If  both 
are  absent,  the  treasurer  might  act  as  presiding  officer.  If 
the  treasurer  is  also  absent,  the  secretary  might  very  prop- 
erly ask  someone  present  to  call  the  meeting  to  order,  who 
will  then  preside  until  a  more  permanent  chairman  is  selected, 
or  the  secretary  might  act  temporarily  himself.  If  so,  he 
should  not  preside  longer  than  is  necessary  for  the  appoint- 
ment of  a  chairman.  He  cannot  act  as  president  and  secre- 
tary at  the  same  time,  and  his  more  important  duty  is  to 
record  the  proceedings  of  the  meeting.  In  the  absence  of  all 
the  regular  officers  from  the  meeting,  the  stockholders  appoint 
a  chairman  and  a  secretary  pro  tern,  who  serve  for  that  meet- 
ing. 

§  283.     Opening  the  Meeting 

Usually,  as  stated,  the  by-laws  provide  that  the  president 
and  secretary  of  the  company  shall  officiate  at  stockholders' 
meetings.  In  such  case,  at  the  appointed  time  and  place  the 
president,  or  in  his  absence  the  next  ranking  officer  present, 
requests  the  meeting  to  come  to  order,  and  the  secretary,  if 
he  has  not  already  done  so,  furnishes  the  presiding  officer 
with  a  copy  of  the  order  of  business  and  presents  a  list  of 
the  stockholders  of  the  company  which  remains  open  during 
the  meeting  for  the  inspection  of  those  present. 

§  284.     RoU-Call 

In  the  smaller  corporations,  the  presiding  officer  after  call- 
ing the  meeting  to  order  requests  the  secretary  to  call  the 
roll.  Practice  varies  as  to  the  precise  manner  of  roll-call. 
Usually  the  secretary  employs  an  alphabetical  list  prepared 
for  the  purpose  and,  calling  the  names  if  he  is  not  personally 
acquainted  with  all  the  stockholders,  notes  thereon  those 
present  either  in  person  or  by  proxy,  and  any  absentees.  (See 
Form  103.) 


312 


MEETINGS   AND    RECORDS 


In  the  larger  corporations  this  plan  is  not  practicable. 
When  the  list  of  stockholders  runs  far  up  in  the  hundreds 
or  thousands,  an  actual  call  of  roll  is  obviously  impossible. 
Instead,  the  chairman  first  requests  the  stockholders  present 
in  person  to  report  to  the  secretary.  As  each  reports,  refer- 
ence is  made  to  the  secretary's  list  of  stockholders,  and  if  the 
person  reporting  is  found  thereon,  his  name  and  the  amount 
of  stock  he  holds  are  recorded.  The  chairman  then  calls  for 
those  who  represent  stockholders  by  proxy.  These  also  re- 
port, each  giving  the  name  of  the  stockholder  and  the  num- 
ber of  shares  he  represents,  handing  in  his  proxy  or,  after 
exhibiting  the  original,  a  certified  copy  thereof,  as  evidence 
of  his  right  to  vote.  Th^  statements  are  verified  in  each  case, 
and  the  names  of  both  principal  and  proxy  and  the  stock  rep- 
resented are  duly  noted.  In  this  way  the  number  of  shares 
represented  and  entitled  to  vote  at  the  meeting  is  arrived  at 
accurately  and  expeditiously. 

After  the  secretary  has  completed  the  roll-call  or  anno- 
tation of  stockholders  present,  he  announces  to  the  chairman 
the  total  number  of  shares  outstanding  entitled  to  vote,  the 
number  necessary  to  constitute  a  quorum,  the  number  repre- 
sented at  the  meeting,  in  person  and  by  proxy,  and,  if  such 
is  the  fact,  that  they  constitute  a  quorum. 

If  a  quorum  is  present,  the  presiding  officer  announces 
the  fact  and  states  that  the  meeting  will  proceed  to  business. 
If  a  quorum  is  not  present  and  no  other  stockholders  can  be 
secured,  the  meeting  may  take  either  one  of  two  courses.  It 
may  adjourn  sine  die,  which  defers  the  election  of  directors 
indefinitely  and  leaves  the  existing  board  to  hold  over  until 
the  next  annual  meeting  or  until  a  special  meeting  is  called 
for  the  election  of  directors,  or  the  meeting  may  adjourn  from 
day  to  day  or,  if  the  charter  or  by-laws  so  permit,  to  any 
desired  future  date,  when,  if  a  quorum  is  secured,  the  meeting 
may  be  held. 


ANNUAL    MEETING    OF    STOCKHOLDERS  ^i^ 

The  important  point  to  be  determined  at  roll-call  is  the 
amount  of  stock  represented.  The  number  of  persons  present 
is  immaterial.  One  man,  by  stock  ownership  or  proxies,  or 
by  both,  might  represent  the  entire  outstanding  stock  of  the 
company  and  such  meeting,  if  properly  conducted,  is  legal 
in  this  country.^  In  England  it  has  been  held  that  one  per- 
son cannot  hold  a  meeting.^"  In  either  country,  however,  the 
party  in  control  could  avoid  all  question  and  satisfy  every  re- 
quirement by  giving  proxies  for  one  or  more  shares  of  stock 
to  convenient  parties  and  allowing  the  parties  thus  qualified 
to  participate  with  him  in  the  meeting. 

§  285.     Proxies 

A  proxy  is  a  special  power  of  attorney  executed  by  a  stock- 
holder of  the  corporation  and  authorizing  some  specified  per- 
son to  represent  him  at  one  or  more  stockholders'  meetings 
of  that  corporation.  A  party  who  holds  and  exercises  the 
powers  of  a  proxy  is  said  to  act  as  a  proxy.  Any  person  com- 
petent to  act  as  an  agent  may  act  as  a  proxy. ^^  (See  Chapter 
LXXIII,  "Proxies.") 

The  right  to  vote  by  proxy  is  not  a  common  law  right.^^ 
It  cannot  therefore  be  exercised  unless  conferred  either  by 
constitutional  provision  as  in  the  case  in  some  states,  by  statute 
provision  as  is  the  case  in  many  states,  or  otherwise  by  charter 
or  by-law  provisions. 

In  the  majority  of  states  the  statutes  prescribe  that  voting 
at  stockholders'  meetings  may  be  either  in  person  or  by  proxy. 
In  some  states  the  statutes  are  merely  permissive,  allowing 
voting  by  proxy  if  provision  therefor  is  made  by  charter  or 
by-laws.     Variations  or  restrictions  of  the  usual  right  to  vote 

» Morrill    v.    Little    Falls    Mfg.    Co.,    53    Minn,    371    (1893);    see    note   21    L.    R.    A. 

^f*  Sharp  V.    Dawes,  2  Q.   B.   D.  26  (1876);  In  re   Sanitary  Carbon   Co.,   12  W.    N. 

^  11  People's    Bank  v.    Superior   Court,    104   Cal.   649   (1894;) ;   Re   Lighthall   Mfg.    Co., 
47  Hun.   258   (1888). 

"  Philips  V.  Wickham,  i   Paige  590  (1829). 


314  MEETINGS   AND    RECORDS 

by  proxy  are  found  in  many  states.  Thus  in  New  Hampshire 
no  person  may  vote  as  proxy,  or  as  principal  and  proxy,  for 
shares  exceeding  one-eighth  of  the  whole  capital  stock.  In 
Maine  a  general  power  of  attorney  authorizing  the  voting  of 
stock  is  good  until  it  expires  or  is  revoked,  but  a  proxy  must 
have  been  executed  within  thirty  days  preceding  the  day  of 
meeting.  In  Pennsylvania  a  proxy  must  have  been  executed 
within  two  months  of  the  date  of  meeting;  in  Massachu- 
setts within  six  months;  in  New  York,  California,  and  Con- 
necticut within  eleven  months ;  in  Minnesota  within  one  year ; 
in  New  Jersey,  Delaware,  North  Carolina,  and  Porto  Rico 
within  three  years ;  and  in  New  Mexico  within  five  years. 

The  original,  or  a  duplicate  or  certified  copy  of  everv  proxy 
should  be  filed  with  the  secretary  of  the  meeting  at  which 
the  powers  conferred  by  the  proxy  are  to  be  exercised,  and 
should  be  preserved  by  him  in  case  the  validity  of  the  meet- 
ing or  any  of  its  proceedings  should  be  questioned.  If  the 
proxy  is  a  continuing  one,  it  should  be  filed  at  the  first  meet- 
ing at  which  its  powers  are  exercised  but  need  not  be  filed  at 
subsequent  meetings. 

§  286.     Quorum 

A  quorum  at  stockholders'  meetings  is  the  number  of  shares 
of  stock  which  must  be  represented — or  the  number  of  mem- 
bers which  must  be  present — ^to  duly  constitute  the  meeting 
and  enable  the  legal  transaction  of  business.  In  some  of  the 
states  the  statutes  provide  that  at  least  a  majority  of  the  out- 
standing stock  must  be  present  in  order  to  constitute  a  quorum. 
Elsewhere  a  similar  provision  is  usually  inserted  in  the  charter 
or  by-laws  of  the  particular  corporation.  If  no  regulating 
provisions  exist,  the  common  law  prevails,  under  which  those 
present  at  a  duly  assembled  stockholders*  meeting  are  entitled 
to  act,  no  matter  whether  they  represent  a  majority  of  the 
outstanding  stock  or  otherwise.     "The  law  is  clear  that  those 


ANNUAL    MEETING   OF   STOCKHOLDERS  315 

stockholders  who  attend  a  duly  called  stockholders*  meeting 
may  transact  the  business  of  that  meeting,  although  a  majority 
in  interest  or  in  number  of  the  stockholders  are  not  present. "^^ 

In  the  absence  of  conflicting  statutes,  the  stock  necessary 
to  constitute  a  quorum  may  be  fixed  at  any  amount  desired. 
The  usual  and  best  practice  requires  a  majority  of  all  the  out- 
standing stock.  A  smaller  quorum  is  sometimes  prescribed 
but  is  not  always  safe.  A  majority  of  a  legal  quorum  may 
always  act.  Hence,  if  less  than  a  majority  constitutes  a  quo- 
rum, it  is  entirely  possible  that  matters  of  the  greatest  impor- 
tance to  the  corporation  will  be  decided  by  less  than  one- 
fourth  of  the  outstanding  stock. 

It  may  be  noted  that  the  statutes  of  a  few  states — New 
York  among  them — reaffirm  the  common  law  as  to  a  quorum 
in  the  case  of  meetings  for  the  election  of  directors.^*  In 
these  states  the  stockholders,  meeting  at  the  duly  appointed 
time  and  place  for  the  election  of  directors,  have  power  to  act 
regardless  of  the  amount  of  stock  they  represent.^^ 

§  287.     Proof  of  Notice 

After  the  presence  of  a  quorum  has  been  ascertained,  the 
secretary,  in  response  to  a  request  from  the  chair,  should  sub- 
mit proof  that  due  notice  of  the  meeting  has  been  given.  For 
this  purpose  a  copy  of  the  notice  should  be  exhibited  with  the 
secretary's  certificate  as  to  its  due  service  attached.  If  greater 
formality  is  desired,  the  secretary's  certificate  might  appear  in 
the  form  of  an  affidavit.  When  less  formality  is  deemed  suf- 
ficient, the  secretary  merely  presents  a  copy  of  the  notice  with 
a  verbal  statement  that  it  has  been  sent  out  as  required  by  the 
by-laws.     (See  Forms  167-169.) 

If  notice  by  publication  has  been  given,  the  secretary 
should  exhibit  copies  of  the  papers  containing  the  notice,  or 

"3  Cook  on  Corp.,   §  607;  Morrill  v.   Little  Falls  Mfg.   Co.,  53  Minn.  371   (1893,). 
"  Stock  Corp.  Law  (N.  Y.),  §  25.  _    ^ 

"  Matter  of  Rapid  Transit  Ferry,  15  App.  Div.   (N.  Y.)  530  (1897). 


3i6  MEETINGS  AND   RECORDS 

copies  of  the  notice  with  the  aflfidavit  of  the  publisher  or  of 
the  secretary  himself  as  to  its  publication.  If  the  formality 
of  an  affidavit  is  deemed  unnecessary,  the  secretary's  certifica- 
tion, or  even  his  mere  statement,  as  to  the  facts  of  publica- 
tion will  usually  suffice. 

§  288.     Reading  of  Minutes 

The  presiding  officer  next  calls  for  the  reading  of  any  un- 
approved minutes.  The  secretary  in  response  reads  the  min- 
utes of  the  annual  meeting  held  the  preceding  year,  also  the 
minutes  of  any  special  meeting  or  meetings  of  the  stockholders 
held  during  the  year.  Occasionally  it  will  happen  that  the 
reading  of  the  minutes  at  the  preceding  annual  meeting  has 
been  passed  or  the  minutes  of  preceding  meetings  have  not 
been  approved  at  such  meeting,  and  the  secretary  will  then 
go  back  still  further,  presenting  all  minutes  of  stockholders' 
meetings  that  have  not  been  read  and  approved  at  some  suc- 
ceeding meeting. 

At  the  close  of  the  reading  of  each  set  of  minutes  or,  if 
preferred,  at  the  close  of  the  reading  of  all  unapproved  min- 
utes, the  chairman  may  announce:  'Tf  there  are  no  objections, 
the  minutes  as  read  will  stand  approved" ;  or  a  motion  may 
be  passed  that  "the  minutes  be  approved  as  read." 

If  errors  are  discovered,  the  minutes  may  be  corrected  at 
once  or  when  the  reading  of  the  particular  minutes  is  con- 
cluded, or  at  any  time  previous  to  their  approval.  If  the 
errors  are  obvious  or  immaterial,  the  presiding  officer  may, 
in  the  absence  of  objection,  merely  direct  the  secretary  to  make 
the  corrections.  If  there  is  any  question  as  to  an  alleged  error 
or  if  the  matters  are  important,  the  correction  of  the  minutes 
is  best  effected  by  motion.  If  the  motion  prevails,  the  min- 
utes must  be  amended  accordingly  and  are  then  "approved  as 
corrected,"  usually  by  order  of  the  president  or  chairman; 
otherwise  by  formal  motion. 


ANNUAL    MEETING    OF    STOCKHOLDERS  317 

The  minutes  of  an  annual  or  special  meeting  cannot  be 
approved  at  a  special  meeting  of  stockholders  unless  so  speci- 
fied in  the  call  for  such  meeting.  Minutes  of  a  directors* 
meeting  are  never  read  at  a  stockholders*  meeting,  except  for 
purposes  of  information  or  to  obtain  the  stockholders'  ratifica- 
tion of  acts  recorded  in  the  minutes. 

The  reading  of  the  minutes  may  be  dispensed  with,  if 
desired,  either  by  formal  motion  or,  in  the  absence  of  objec- 
tion, by  mere  announcement  of  the  chairman. 

§  289.     Annual  Reports 

Under  the  usual  order  of  business  the  annual  reports  of 
officers  and  committees  follow  the  reading  of  minutes.  The 
president's  report  is  the  first  official  report  to  be  presented. 
Following  this  usually  comes  the  treasurer's  report,  and  if 
other  officers  have  reports  to  make  or  if  the  board  of  direc- 
tors or  any  committees  have  reports  to  submit,  they  are  in 
order  at  this  time. 

Before  a  report  presented  at  the  annual  meeting  is  for- 
mally received,  it  is  discussed  if  necessary  and  any  desired 
questions  asked  and  answered  concerning  it.  A  motion  is 
then  made  that  the  report  be  received  and  filed,  or  otherwise 
disposed  of  as  may  be  necessary;  or,  in  the  absence  of  objec- 
tion, its  proper  disposition  may  be  effected  by  order  of  the 
chairman.  If  any  report  proves  to  be  incomplete,  erroneous, 
or  otherwise  objectionable,  a  motion  may  be  made  to  return 
such  report  for  correction  or  for  revision,  or  it  might  even 
be  rejected  absolutely,  such  rejection  serving  as  an  emphatic 
rebuke  to  the  official  or  committee  by  whom  the  report  was 
made. 

As  reports  are  ordered  received,  the  secretary,  unless  it  is 
expressly  otherwise  ordered,  takes  charge  of  and  preserves 
them  for  future  reference.  Reports  of  special  importance  are 
sometimes  ordered  spread  upon  the  minutes,  or  entered  in  the 


3i8 


MEETINGS   AND    RECORDS 


minute  book  immediately  following  the  minutes  of  the  meet- 
ing. 

§  290.    Election  of  Directors 

In  the  larger  corporations  the  annual  election  of  directors 
is  the  most  important  event  in  the  corporate  calendar,  decid- 
ing the  management  and  the  general  policy  of  the  company 
for  the  ensuing  year.  In  small  or  close  corporations,  on  the 
other  hand,  the  election  of  directors  is  frequently  omitted, 
the  directors  then  in  office  holding  over  for  another  year  or 
until  their  successors  are  elected.  There  is  no  legal  objection 
to  this  practice  when  all  the  stockholders  acquiesce. 

Voting  for  election  of  directors  should  be  by  ballot.  In 
perhaps  the  majority  of  the  states  the  statutes  require  this 
method  to  be  followed.  The  election  is  usually  conducted  by 
inspectors  or  tellers,  in  some  states  as  a  matter  of  statutory  re- 
quirement ;  elsewhere  as  a  matter  of  by-law  provision  or  mere- 
ly of  convenience.  These  inspectors  or  tellers,  usually  two 
in  number,  may  be  stockholders  or  otherwise,  as  seems  best 
to  the  meeting,  but  candidates  who  are  to  be  voted  upon  at 
the  election  should  not  be  appointed.  The  inspectors  take 
entire  charge  of  the  election.  At  its  close  they  announce  the 
results,  or  otherwise  hand  their  report  to  the  chairman  of 
the  meeting,  who  reads  the  results  from  the  inspectors'  re- 
port. The  report  is  then  handed  to  the  secretary  for  preserva- 
tion or  for  such  other  disposition  as  may  be  prescribed. 

In  the  larger  corporations  the  formalities  of  an  election  of 
directors  are  usually  strictly  observed.  In  the  smaller  cor- 
porations such  elections  are  frequently  conducted  very  in- 
formally. Where  there  is  entire  agreement,  the  board  is  some- 
times selected  by  conference,  and  the  secretary — authorized 
thereto  by  motion — casts  the  single  ballot  of  the  meeting  for 
the  parties  named. 

Unless  otherwise  provided  by  statute  or  the  charter  or 


ANNUAL    MEETING   OF    STOCKHOLDERS  319 

by-laws  of  the  corporation,  a  majority  of  the  votes  cast  at 
an  election  of  directors  held  at  a  duly  constituted  meeting 
elects,^®  even  though  these  are  not  a  majority  in  interest  of 
all  those  present  at  the  meeting.  In  other  words,  stockholders 
who  do  not  vote  cannot  have  their  votes  counted  in  the  nega- 
tive. ^^  The  charter  or  by-laws  may,  however,  in  the  absence 
of  any  conflicting  statutes,  modify  this  rule  by  providing  that 
the  votes  of  a  majority  of  those  present  at  the  meeting,  or  of 
a  majority  or  any  other  desired  proportion  of  the  outstand- 
ing stock,  shall  be  necessary  to  elect. 

If  less  than  the  full  number  of  directors  to  be  elected  re- 
ceive the  majority  or  plurality  vote  necessary  to  elect,  those 
receiving  the  required  majority  or  plurality  vote  are  elected 
and  another  ballot  or  another  election  may  be  held  to  elect 
the  remainder.  ^^  It  may  be  noted  that  unless  the  vStatutes, 
charter,  or  by-laws  provide  that  a  plurality  of  votes  elect,  a 
majority  of  all  the  votes  cast  is  necessary  to  an  election. ^^ 
After  the  ballot  has  been  counted  or  announced,  it  is  too  late 
to  receive  additional  votes. 

§  291.     Voting  at  Elections 

If  the  statutes  do  not  prescribe  the  method  of  voting  at 
elections  of  directors,  it  may  be  by  any  desired  method  that 
will  fairly  indicate  the  will  of  those  entitled  to  vote. 

The  stock  books  of  the  corporation  which  show  the  trans- 
fer and  ownership  of  stock  are  in  most  states  the  final  and 
decisive  evidence  as  to  who  is  entitled  to  vote  at  corporate 
elections.  If  the  corporation  keeps  no  other  stock  book  than 
a  stock  certificate  book,  this  will  be  sufBcient  if  it  shows  the 
stock  transfers  and  ownership.  A  stockholder  cannot  be  kept 
from  voting  on  account  of  the  loss  or  absence  of  his  stock 


18  2  Cook  on   Corp.,   §608. 

"State  V.    Green,   37   O.    St.    227   (1881) ;    Smith  v.    Proctor,    130   N.    Y.   3,19  (1891). 

18  Wright  V.    Commonwealth,  109  Pa.   St.   cjfo  (1885). 

i»i.  Thompson  on  Corp.,  §846;  2  Cook  on  Corp.,  §  608. 


220  MEETINGS   AND    RECORDS 

certificate,  nor  can  he  be  denied  the  voting  right  because  his 
stock  is  not  fully  paid,  unless  it  is  expressly  so  provided  by 
the  statutes  of  the  state  or  the  charter  of  the  corporation.^"  A 
by-law  provision  restricting  the  voting  right  is  not  ordinarily 
effective.  A  corporation  cannot  vote  on  its  own  stock,  whether 
held  in  the  name  of  the  corporation  or  a  trustee  for  the  cor- 
poration. Any  sale  or  issue  of  stock  made  by  the  directors 
to  control  an  election  can  usually  be  stopped  by  injunction,  or 
the  courts  may  be  invoked  to  set  the  election  aside. 

The  inspectors,  tellers,  or  other  ofificers  conducting  an  elec- 
tion have  no  authority  to  refuse  the  vote  of  any  stockholder 
of  record,  nor  the  right  to  receive  the  vote  of  anyone  who  is 
not  a  stockholder  of  record.  Even  when  grounds  for  so  doing 
exist,  the  courts  alone  can  go  behind  the  corporate  records 
and  enjoin  stockholders  of  record  from  voting,  or  set  aside 
an  election  carried  by  the  vote  of  such  stock.  The  secretary 
or  chairman  of  the  meeting  has  no  authority  to  decide  who 
may  vote,  the  matter  resting  with  the  tellers  or  other  persons 
conducting  the  election,  who  must  be  governed  by  the  stock 
books  of  the  corporation. 

Under  the  general  rule  in  regard  to  voting  at  elections,  a 
stockholder  is  entitled  to  one  vote  for  each  director  to  be 
elected,  for  each  share  of  stock  standing  in  his  name  on  the 
books  of  the  corporation.^^  If  there  are  any  variations  of 
this  usual  rule,  such  as  cumulative  voting,  classified  voting, 
or  restriction  of  voting  to  one  class  of  stock,  such  variation 
should  be  stated  as  clearly  as  possible  in  the  charter  or  by- 
laws of  the  corporation  and  must,  as  a  matter  of  course,  con- 
form to  the  requirements  of  any  state  statutes  on  the  subject. 

Cumulative  Voting.  The  usual  method  of  voting  for 
directors  results  in  the  election  of  the  entire  board  of  direc- 
tors by  those  holding  a  majority  of  the  stock.     The  cumula- 


te Downing  V.    Potts,   23   N.   J.    L.   66  (1851);   People  v.   Albany,   etc.,    R.    R.,   55 
Barb.,  344,  386  (1869);  Am.,  etc.,  Co.  v.   State  Board,  56  N.  J.   L.  389  (1894). 
2^  2  Cook  on  Corp.,   §  609. 


ANNUAL    MEETING   OF    STOCKHOLDERS  321 

tlve  system  of  voting  is  a  modification  of  this  usual  method 
whereby  representation  on  the  board  may  be  secured  by  the 
minority.  Under  it,  while  each  share  still  has  as  many  votes 
as  there  are  directors  to  be  elected,  and  these  votes  may  be  cast 
one  for  each  candidate  as  before,  all  of  these  votes,  if  so  de- 
sired, may  be  cast  for  one  candidate  or  may  be  divided  among 
any  or  all  of  the  candidates  as  the  stockholder  sees  fit.  Thus 
if  five  directors  are  to  be  elected,  a  stockholder  owning  one 
share  of  stock  may,  under  the  cumulative  system,  cast  one 
vote  for  each  of  five  candidates  but,  if  he  prefers,  may  cast 
five  votes  for  one  candidate,  or  two  votes  for  one  and  three 
for  another,  or  divide  his  five  votes  among  the  candidates  in 
any  other  way  he  sees  fit. 

The  practical  result  of  this  modification  of  the  usual  system 
is  to  insure  minority  representation  whenever  the  minority 
holding  of  stock  is  at  all  material.  Thus,  if  a  corporation  has 
one  hundred  shares  of  stock  outstanding  and  five  directors 
are  to  be  elected,  a  stockholder  owning  or  controlling  49 
shares  of  this  stock  would  not  under  the  usual  system  be  able 
to  elect  a  single  director.  Under  the  cumulative  system  he 
could  infallibly  elect  two  directors.  Or  if  he  controlled  but 
34  shares,  he  could  still  elect  the  same  number  of  directors. 
If  he  controlled  but  17  shares,  he  would  still  be  able  to  elect 
one  member  of  the  board. 

The  calculation  is  simple.  As  each  stockholder  is  entitled 
to  one  vote  on  each  of  his  shares  for  each  of  the  five  directors 
to  be  elected,  this  gives  him  5  votes  for  each  share  held,  or 
85  votes  for  his  17  shares.  The  remaining  stock — 83  shares — 
if  under  one  control,  gives  a  total  of  415  votes  opposed.  If, 
then,  the  85  votes  of  the  minority  stockholder  are  cast  for 
one  candidate,  no  possible  combination  of  the  opposing  415 
votes  can  defeat  him. 

In  a  number  of  states  cumulative  voting  is  prescribed 
either  by  the  constitution  or  statutes.     In  many  other  states 


322 


MEETINGS  AND   RECORDS 


the  statutes  permit  it  but  leave  its  adoption  optional  with  the 
corporation.  In  any  state  where  the  statutes  are  not  directly 
or  indirectly  prohibitive,  cumulative  voting  may  be  secured 
by  proper  provision  in  the  charter  or  by-laws  of  the  corpora- 
tion. 

Under  the  system  of  cumulative  voting,  it  is  never  pos- 
sible for  the  minority  stockholders  to  control,  provided  the 
majority  act  together  intelligently.  It  may  be  said,  however, 
that  when  it  is  employed  the  majority  should  understand  its 
workings,  or  otherwise  unexpected  results  may  ensue.  If  the 
majority  scatter  their  votes,  while  a  strong  minority  combine, 
it  would  be  entirely  within  the  realm  of  possibility  for  this 
minority  to  gain  control  of  the  board. 

The  board  representation  secured  to  the  minority  inter- 
ests by  cumulative  voting  is  a  very  material  advantage,  en- 
abling them  to  keep  in  touch  with  the  operations  of  the  com- 
pany and  informed  as  to  any  proposed  action  of  the  board. 
The  minority  cannot  interfere  with  or  prevent  any  proper 
action,  but  if  these  actions  are  objectionable  to  them,  they 
are  informed  in  advance  and  may  use  such  restraining  in- 
fluence as  they  can.  If  improper  actions  are  proposed,  they 
may  prevent  them  by  legal  interference. 

§  292.     Other  Business 

The  consideration  of  any  unfinished  business  follows  the 
election  of  directors.  This  includes  any  matters  which  were 
under  consideration  but  not  disposed  of  at  any  prior  stock- 
holders' meetings,  whether  regular  or  special.  Matters  re- 
ferred to  committees  for  consideration,  or  investigation,  or 
report  come  under  this  head  and  may  be  acted  upon  at  this 
time. 

The  secretary  usually  brings  up  any  matters  of  unfinished 
business,  but  the  stockholders  or  the  chairman  himself  may 
properly  call  them  to  the  attention  of  the  meeting. 


ANNUAL    MEETING    OF    STOCKHOLDERS 


323 


If  there  is  no  unfinished  business,  or  otherwise  upon  its 
disposal,  the  presiding  officer  passes  on  to  the  next  order  of 
business  and  inquires  if  there  is  any  new  business  to  be 
brought  before  the  meeting.  Under  this  head  come  any  mat- 
ters requiring  the  attention  of  the  meeting  not  before  con- 
sidered. These  may  be  brought  up  either  by  the  officials  of 
the  meeting  or  by  any  of  the  stockholders  present. 

§  293.     Adjournment 

After  the  disposal  of  any  new  business  brought  before 
the  meeting,  adjournment  is  in  order.  This  may  be  by  mo- 
tion. Usually,  however,  when  this  point  is  reached  the  chair- 
man inquires  if  there  is  any  other  business  before  the  meet- 
ing, and,  if  no  response  is  received,  declares  the  meeting  ad- 
journed.    Such  adjournment  is  sine  die,  i.e.,  final. 

If  the  business  of  the  meeting  cannot  be  completed  at 
the  one  session,  or  if  any  other  reasons  render  its  continua- 
tion desirable,  it  is  not  adjourned  sine  die,  but  to  such  con- 
venient future  date  as  may  be  decided  upon.  An  adjournment 
of  this  kind  is  usually  by  motion,  but  if  it  is  obviously  desir- 
.able  or  advisable,  the  chairman  might  properly  adjourn  the 
meeting  himself,  merely  announcing:  "If  there  is  no  objec- 
tion, the  meeting  stands  adjourned  until  .  .  .  ." 

Adjournment  may  be  made  only  by  consent  of  a  majority 
of  those  present,  and  the  chairman  has  no  power  to  declare 
a  meeting  adjourned  in  defiance  of  this  majority.  If  he  does 
so  notwithstanding,  any  stockholder  may  demand  a  vote,  and, 
if  this  vote  is  against  adjournment  or  if  the  chairman  should 
decline  to  put  the  matter  to  vote,  a  majority  of  the  stock- 
holders may  remain  and  continue  the  meeting,  electing  a  new 
chairman  if  necessary,  and  even  adjourning  to  another  room.^^ 

If ^  the  meeting  adjourns,  the  adjourned  meeting  is  re- 
garded as  a  continuation  of  the  original  meeting  and  need  not 

^  State   V.    Cronan,   231  Nev.   43.7   (1897). 


324 


MEETINGS   AND    RECORDS 


therefore  be  again  notified  to  the  stockholders.  If  the  ad- 
journment is  for  more  than  a  few  days,  however,  it  is  always 
proper  for  the  secretary  to  send  out  notice  of  the  adjourned 
meeting  a  reasonable  time  before  it  convenes. 

As  an  adjourned  meeting  is,  from  a  legal  standpoint, 
merely  a  continuation  of  the  original  meeting,  the  same  offi- 
cers preside  and  any  business  that  might  have  been  transacted 
at  the  first  meeting  may  be  acted  upon  at  its  adjournment,  or 
at  any  adjournment  from  an  adjourned  meeting. ^^ 

§  294.     Signing  Minutes 

As  soon  after  the  meeting  as  convenient  and  while  its  de- 
tails are  fresh  in  his  mind,  the  secretary  should  write  up  its 
proceedings  in  the  minute  book  and  sign  them  with  his  name 
and  official  designation.  The  presiding  officer  also  visually 
affixes  his  signature. 

The  minutes  are  the  legal  evidence  of  the  proceedings  of 
the  meeting,  and  this  double  signature  is  of  advantage  in 
event  of  any  dispute  as  to  the  accuracy  of  the  record.  (See 
Chapter  XLII,  "Minutes  of  Meetings." 


23  People   V.    Batchelor,    22   N.    Y.    128    (i860) ;    Staats   v.    Borough    of   Washington, 
44  N.  J.  L.   605.  eii   (1882). 


CHAPTER   XL 

SPECIAL  MEETINGS    OF   STOCKHOLDERS 

§  295.     Special  or  Called  Meetings 

"Special"  or  "called"  meetings  are  held  when  matters  de- 
manding the  attention  of  the  stockholders  arise  in  the  interim 
between  annual  meetings.  As  in  the  case  of  annual  meetings, 
special  meetings  of  stockholders  must  be  held  within  the  state 
in  which  the  corporation  was  organized,  unless  otherwise  ex- 
pressly permitted  by  statute  or  charter  provision,  and  usually 
at  the  principal  office  of  the  corporation.  Statutory  provisions 
regarding  special  meetings  are  found  in  a  number  of  states. 
These  mainly  relate  to  the  method  of  calling  or  notifying  such 
meetings. 

Special  meetings  differ  from  the  annual  meeting  in  the 
following  important  details:  (i)  They  must  be  authorized 
by  a  more  or  less  formal  call.  (2)  Notice  of  the  time,  of 
the  place,  and  of  all  business  to  be  transacted  at  the  meeting 
must  be  given  each  stockholder  of  record.  (3)  No  other 
business  save  that  so  notified  may  be  transacted  at  the  meet- 
ing. 

The  formalities  of  special  meetings  must  be  strictly  ob- 
served, or  action  taken  thereat  may  be  invalidated.  They  may, 
however,  be  waived  by  consent  of  every  interested  party, 
either  formally  expressed  in  writing,  or  indicated  by  their 
presence  at,  and  participation  or  acquiescence  in,  the  meeting. 
(  Form  46. ) 

§  296.     Call  for  Meeting 

The  time  and  place  of  special  meetings  cannot,  from  the 
nature  of  the  case,  be  prescribed  by  the  by-laws  and  hence 


326  MEETINGS   AND   RECORDS 

each  meeting  must  be  formally  called  as  the  necessity  arises. 
The  manner  of  this  call  is  sometimes  prescribed  by  statute  or 
charter  but  is  usually  left  for  the  by-laws.  If  neither  the 
statutes,  charter,  nor  by-laws  prescribe  the  manner  of  calling 
special  meetings  of  stockholders,  the  directors  may  always  do 
so  by  resolution,^  or  the  stockholders  may  unite  in  calling  a 
meeting,  which,  provided  the  number  joining  in  the  call  repre- 
sents a  fair  proportion  of  the  outstanding  stock  and  the  time 
and  place  is  reasonable,  will  be  legal.     (See  Form  52.) 

Ordinarily  the  by-laws  provide  that  special  meetings  may 
be  called  in  any  one  of  four  ways:  ( i )  By  written  call  signed 
by  the  president  (Forms  47,  48) ;  (2)  by  resolution  of  the 
directors  (Form  51)  ;  (3)  by  written  call  signed  by  two  or 
more  directors  (Forms  49,  50)  ;  (4)  by  written  or  published 
call  subscribed  by  a  specified  number  of  stockholders,  or  a 
certain  proportion  of  the  outstanding  stock,  usually  ranging 
from  one-third  to  a  majority  (Forms  52,  54). 

The  call  and  notice  for  a  special  meeting  must  state  its 
time,  place,  and  purpose.^  These  essentials  every  stockholder 
is  entitled  to  know,  and  the  omission  of  any  one  might  invali- 
date the  entire  action  of  the  meeting.  No  business  except 
that  which  has  been  specified  in  the  call  and  in  the  notice  which 
follows  the  call,  can  be  legally  transacted  at  a  special  meeting} 
To  end  the  call  or  notice,  as  is  frequently  done,  with  some 
general  phrase,  such  as  "and  all  other  matters  that  may  come 
before  such  meeting,"  does  not  add  to  the  scope  of  the  meeting 
in  any  way  and  does  not  in  itself  legally  authorize  the  consider- 
ation of  anything.* 

Where  a  company  with  but  few  stockholders  is  to  be  as- 
sembled in  special  meeting,  time  may  be  saved  by  employment 
of  the  combined  call  and  waiver  of  notice  (Form  46).    This 


*  Commonwealth    v.    Smith,    45    Pa.    St.    59    (1863) ;    Cassell    v.    Lexington,    etc., 
Co.,  9  S.    W.    Rep.   502  (1888). 

2  2    Cook    on    Corp.,    §595. 

» Clark    &    Marshall    on    Corp.,    §  647.. 

*  Morawetz  on  Corp.,   §  482;   People's  Ins.   Co.  v.   Westcott,  So  Mass.  440  (i860). 


SPECIAL    MEETINGS    OF   STOCKHOLDERS 


327 


requires  the  signature  of  every  stockholder  to  make  it  elTec- 
tive,  but  the  meeting  so  authorized  may  be  held  at  once,  and, 
if  so  agreed,  any  business  within  the  powers  of  the  stock- 
holders may  be  transacted  thereat.  A  provision  in  a  duly 
signed  call  and  waiver  for  the  "transaction  at  such  meeting 
of  any  and  all  business  pertaining  to  the  affairs  of  the  com- 
pany," is  effective,  since  everyone  interested  has  agreed  there- 
to.'    (See  Chapter  LXX,  "Calls  and  Waivers.") 

The  first  meeting  of  stockholders  is  merely  a  form  of 
special  meeting  and  is  usually  assembled  by  call  and  waiver 
signed  by  all  those  entitled  to  be  present  (Form  31). 

§  297.     Notice  of  Special  Meeting 

The  call  for  a  special  meeting  must  not  be  confused  with 
the  notice  of  such  a  meeting.  The  call  is  the  written  authority 
or  instructions,  usually  handed  or  sent  to  the  secretary,  pur- 
suant to  which  the  meeting  is  to  be  assembled.  (See  Forms 
46-49.)  The  notice,  on  the  other  hand,  is  the  actual  state- 
ment of  the  time,  place,  and  purposes  of  the  meeting,  sent  out 
to  the  stockholders,  usually  by  the  secretary,  in  obedience  to 
the  instructions  of  the  call  and  in  accordance  with  its  terms.* 
If  there  is  any  material  difference  as  to  these  between  the 
call  and  the  notice,  the  meeting  is  invalidated  thereby.  The 
time  means  both  the  day  and  the  hour.  No  business  other 
than  that  specified  in  the  notice  may  be  transacted  at  a  special 
meeting.  If  one  single  stockholder  is  not  properly  notified, 
he  may  be  able  to  set  the  entire  proceedings  of  the  meeting 
aside.     (See  Chapter  LXXII,  "Notices  of  Meetings.") 

When,  as  is  usually  the  case,  notice  of  a  special  meeting 
must  be  sent  by  mail  to  the  "last  known  address"  of  each 
stockholder,  or  to  his  "address  as  it  appears  on  the  books 
of  the  corporation,"  the  secretary  must  be  prepared  to  make 


"  2  Cook  on  Corp.,  %  599^ 

« I    Morawetz   on    Corp.,    §  482. 


328 


MEETINGS   AND    RECORDS 


affidavit,  if  necessary,  that  this  has  been  done.  If  no  special 
method  of  service  or  pubHcation  is  prescribed  by  the  statutes, 
the  by-laws,  or  other  corporate  regulation,  the  secretary  must 
himself  or  by  deputy  give  personal  notice  by  placing  a  copy 
of  the  notice  in  the  hands  of  each  stockholder/  If  no  time 
is  prescribed,  notice  must  be  served  a  "reasonable  time  before 
the  meeting."  ^  When  notice  is  requested  to  be  given  a  certain 
number  of  days  before  the  meeting,  the  time  should  be  counted 
exclusive  of  the  day  of  notice  and  the  day  of  meeting,  though 
in  New  York  by  statute  provision  but  one  of  these  days  need 
be  excluded. 

If  the  secretary  refuses  to  give  proper  notice  of  a  spe- 
cial meeting  after  it  has  been  dujy  called,  anyone  interested 
may  send  out  the  notice,  and  such  notice,  if  in  due  form  and 
properly  served  on  each  stockholder,  will  be  effectual. 

§  298.     Consent  Meetings 

Special  meetings  of  stockholders  may  be  assembled  at  any 
time  without  the  usual  call  and  notice  if  all  interested  sign  a 
formal  waiver  thereof.^  Also,  if  without  any  such  waiver, 
all  the  stockholders  assemble  in  meeting,  no  matter  how  called 
or  whether  called  at  all,  it  is  termed  a  ''consent  meeting,"  and, 
all  present  acquiescing,  any  business  within  the  stockholders' 
powers  may  be  transacted  thereat.^**  Those  present  and  parti- 
cipating in  such  meeting  are  thereby  estopped  from  later 
objection  to  any  informality  of  call  or  notice,  and,  as  all 
concerned  are  present,  no  one  is  left  who  has  a  right  to 
object. 

When  consent  meetings  are  held,  it  is  important  that  the 
minutes  shall  show  the  presence  of  every  stockholder.     Also 

'  Stebbins  et  al.,  Admrs.  v.  Merritt  et  al.,  64  Mass,  27  (1852);  Tuttle  v.  Mich.  Air 
Line  R.    R.    Co.,  35  Mich.   247  (1877). 

8  Re  Long  Island  Railroad,  19  Wend.  37  (1837) ;  Covert  v.  Rogers,  2^  Mich.  363 
(1878). 

*3  Gark  &  Marshall  on  Corp.,  §  647,  note  276. 

^0  Handley  v.  Stutz,  139  U.  S.  417  (1890);  In  re  Griffing  Iron  Co.,  6%  N.  J.  L. 
168  (1898);  aflfd.,  63-  N.  J.  L.  JS7  (1899). 


SPECIAL    MEETINGS    OF    STOCKHOLDERS 


329 


if  the  action  taken  is  important,  it  is  always  advisable  that 
every  person  present  shall  either  sign  the  minutes,  v^hich  is 
the  most  effective  evidence  of  attendance  and  acquiescence,  or 
otherwise  sign  a  waiver  of  the  formalities.     ( See  Form  46. ) 

In  a  small  or  close  corporation  consent  meetings  can 
be  readily  assembled  and  are  the  rule  when  special  meetings 
are  necessary.  In  the  larger  corporations  such  meetings  are 
in  most  cases  obviously  impossible. 

§  299.     Opening  Formalities 

The  procedure  for  opening  a  special  meeting  is  the  same 
as  in  the  case  of  the  annual  meeting  ( §  283).  The  alphabetical 
list  of  stockholders  required  by  statute  in  some  of  the  states  at 
the  annual  meeting  of  stockholders,  is  not  required  at  special 
meetings  unless  directors  are  to  be  elected. 

The  proof  of  proper  call  and  notice  of  the  meeting  fol- 
lows the  roll-call.  The  secretary  should  present  the  original 
duly  signed  call;  also  a  copy  of  the  notice  sent  out  pursuant 
to  the  call,  with  his  certificate  attached  showing  that  the 
notice  was  properly  addressed  and  mailed  to  each  stockholder 
the  necessary  number  of  days  before  the  date  of  the  meeting. 
The  call  and  notice  may  be  ordered  received  and  filed  as  in 
the  case  of  a  regular  meeting,  or,  as  the  validity  of  the  meet- 
ing is  dependent  upon  its  due  assembling  evidenced  by  the  call 
and  notice,  they  may  very  properly  be  ordered  spread  upon 
the  minutes. 

If  the  meeting  has  been  assembled  by  call  and  waiver 
signed  by  all  the  stockholders  of  the  company,  this  instru- 
ment should  be  presented  to  the  meeting  and  may  be  properly 
included  by  the  secretary  in  his  minutes  without  instruction. 

§  300.     Special   Business 

Minutes  of  previous  stockholders'  meetings  cannot  prop- 
erly be  approved  at  a  special  meeting  unless  so  provided  in 


330 


MEETINGS   AND    RECORDS 


the  call  and  notice  or  other  authorization  of  the  meeting,  nor 
can  any  other  business  be  transacted  save  that  so  specified." 
Hence  the  particular  business  for  which  the  meeting  was  called 
should  be  taken  up  at  once.  The  presiding  officer,  or  at  his 
request  someone  present,  states  the  purposes  of  the  meeting 
and  makes  such  explanations  as  may  be  necessary.  Or  the 
presiding  officer  may  call  upon  the  secretary  to  read  the  notice 
of  the  meeting  in  which  its  purposes  are  set  forth  and  then 
call  upon  someone  familiar  with  the  matter  to  explain  it  to 
the  stockholders.  After  such  statement  and  explanation  and 
any  desired  discussion,  someone  interested  usually  presents 
and  moves  the  adoption  of  a  resolution  covering  the  matter. 
The  meeting  may  then,  at  its  discretion,  dispose  of  this  reso- 
lution in  any  parliamentary  way. 

§  301.     Adjournment 

As  already  stated,  no  business  of  any  kind  may  be  trans- 
acted at  a  special  meeting  save  that  specifically  authorized. 
As  soon,  therefore,  as  the  particular  business  for  which  the 
meeting  was  called  is  disposed  of,  nothing  is  left  but  adjourn- 
ment. This  may  be  by  motion,  or,  if  no  one  objects,  the 
president  may  merely  state  that  "no  further  business  being 
before  the  meeting,  it  stands  adjourned." 

A  special  meeting  may  be  adjourned  to  another  day  just 
as  may  an  annual  meeting,  and  at  the  adjourned  meeting  any 
business  set  forth  in  the  notice  for  the  original  meeting  may 
be  considered.  New  business  cannot,  however,  be  introduced 
or  considered.  No  notice  of  an  adjourned  meeting  is  neces- 
sarily sent  to  stockholders. 


"Warner   v.   Mower,    11    Vt.   385   (183.9);   People's   Mut.    Ins.    Co.   v.   Westcott, 
Mass.  440  (i860);  Atlantic  De  Laine  Co.  v.  Mason,  5  R.  I.  463  (1858). 


CHAPTER    XLI 

MEETINGS   OF   DIRECTORS   AND   OF   STANDING 
COMMITTEES 

Directors 

§  302.     Time  of  Meetings 

The  by-laws  usually  set  forth  the  general  details  of  direc- 
tors' meetings.  The  board  itself  may  provide  for  any  details 
not  already  prescribed  by  some  competent  authority. 

Special  meetings  of  directors  are  called  when  the  neces- 
sity arises.  Regular  meetings  are  held  at  specified  times — 
commonly  once  a  month — usually  fixed  by  the  by-laws.  In 
the  smaller  corporations  with  boards  consisting  of  a  few  mem- 
bers easily  assembled  in  special  meeting,  and  also  in  the  larger 
corporations  whose  affairs  are  conducted  mainly  by  standing 
committees,  regular  board  meetings  once  a  quarter,  or  even 
at  longer  intervals,  are  frequently  sufficient. 

§  303.     Place  of  Meetings 

The  usual  place  for  meetings  of  directors  is  the  principal 
office  of  the  corporation  in  the  state  of  its  creation.  Directors' 
meetings  may,  however,  be  held  elsewhere,  either  within  the 
state,^  or  without  the  state  in  the  absence  of  prohibition,^  if 
properly  authorized  by  the  charter,  the  by-laws,  or  by  due 
resolution  of  the  directors.  If  prohibited  by  statutes,  charter, 
or  by-laws,  meetings  outside  the  state  are  voi4,  and  their  ac- 
tions of  no  effect.^ 


1  Corbett  v.    Woodward,   5    Sawy,   403    (1879) ;   Ashley   Wire   Co.   v.    111.    Steel   Co., 
164   III.    149   (1896). 

2  3  Cook  on  Corp.,   5713a;   Saltmarsh  v.    Spaulding,   147  Mass.  224  (1888). 
'Brockway  v.   Gadsden,  etc.,  Co.,   102  Ala.  620  (1893);   Union  Nat.   Bk.   v.   State 

Bank,  155  Mo.  95  (1899). 


332  MEETINGS   AND    RECORDS 

In  a  majority  of  the  states  the  statutes  provide  that  di- 
rector's meetings  may  be  held  outside  the  state  if  authorized 
in  some  specified  manner — usually  by  the  by-laws,  in  some 
states  by  the  charter,  in  others  by  either,  but  in  one  or  two 
states  by  mere  resolution  of  the  directors.  In  New  York 
meetings  of  directors  may  be  held  outside  the  state  unless 
otherwise  expressly  provided  in  the  charter  or  by-laws/  Other 
provisions  affecting  directors'  meetings  outside  the  state  are 
found  in  a  number  of  states. 

§  304.     Purposes  of  Meetings 

At  duly  assembled  regular  meetings  of  directors,  any  busi- 
ness within  the  power  of  the  board  may  be  transacted.  At 
special  meetings,  unless  otherwise  agreed  by  every  member  of 
the  board,  only  such  business  may  be  acted  upon  as  is  set 
forth  in  the  call  and  notice  of  the  meeting.  If,  however,  the 
notice  of  a  special  meeting  does  not  specify  its  purposes,  any 
ordinary  business  affairs  of  the  corporation  may  be  transacted 
thereat,  unless  the  by-laws  specifically  provide  that  only  such 
business  as  has  been  duly  notified  may  be  transacted  at  spe- 
cial meetings  of  the  board. 

§  305.     Assembling  Meetings 

The  time  and  place  of  regular  meetings  are  usually  pre- 
scribed in  the  by-laws,  are  supposed  to  be  known  to  the  di- 
rectors, and  do  not  depend  for  their  legality  upon  calls, 
waivers,  or  notices.^  Notices  are,  it  is  true,  generally  pro- 
vided for  in  the  by-laws,  but  this  is  a  practical  measure  to 
insure  the  attendance  of  directors,  and  is  not  in  compliance 
with  legal  requirements.  To  prevent  any  question  on  this 
point,  however,  the  by-laws  of  the  larger  corporations  custom- 
arily provide  that  failure  to  send  out  notice  of  a  regular  meet- 

*  N.  Y.   Bus.   Corp.   Law,  §  2. 

"5  Whitehead    v.    Rubber    Co.,    52   N.    J.    Eq.    78,    83    (189^);    Western    Imp.    Co.    v. 
Bank,   103  Iowa  45,5  (1897);  Atlantic,  etc.,  Co.   v.  Sanders,  36  N.    H.  2512  (i8sS). 


MEETINGS    OF    DIRECTORS  333 

ing  shall  not  affect  its  legality  nor  the  legality  of  any  action 
taken  thereat. 

Special  meetings,  on  the  other  hand,  are  assembled  as  the 
necessity  arises,  must  be  called  by  proper  authority,  and  must 
be  formally  notified  to  every  member  of  the  board,  unless  these 
formalities  are  duly  waived.  Accordingly  special  meetings  of 
the  board  are  assembled  by  means  of  the  call  followed  by 
notice,  or  by  means  of  a  combined  call  and  waiver  of  notice. 
Or  if  all  the  members  of  the  board  can  be  gotten  together, 
a  special  meeting  may  by  agreement  be  held  at  any  time  and 
without  formality.  These  methods  of  assembling  meetings 
of  directors  are  discussed  in  the  sections  which  follow.  (See 
Chapter  LXXI,  "Calls  and  Waivers  for  Directors'  Meet- 
ings.") 

§  306.     Call  for  Special  Meetings 

The  call  for  a  special  meeting  of  directors  is  the  formal 
instrument  which  authorizes  its  assembling,  specifying  its 
time,  place,  and  purposes,  and  usually  directing  or  otherwise 
obligating  the  secretary  to  notify  such  meeting  to  the  mem- 
bers of  the  board. 

In  some  few  states  the  statutes  prescribe  by  whom  special 
meetings  of  directors  may  be  called.  In  the  majority  of  the 
states  the  matter  is  left  entirely  for  by-law  regulation.  These , 
almost  invariably  empower  the  president  to  call  special  meet- 
ings, usually  alone,  but  sometimes  in  conjunction  with  some 
other  officer.  Usually  they  provide  that  two  or  more  of  the 
directors  may  call  such  meetings.  Occasionally  a  certain  pro- 
portion in  interest  of  the  stockholders  are  authorized  thereto. 
Whether  so  specified  in  the  by-laws  or  not,  special  meetings  of 
directors  may  always  be  called  by  due  resolution  of  the  board. 
Consent  meetings  are  assembled  informally.     (See  §  309.) 

The  call  for  a  special  meeting  of  directors  by  whomsoever 
issued,  to  be  legally  effective,  must  always  specify  the  time  of 


334 


MEETINGS   AND    RECORDS 


meeting  and  its  place,  and  if  business  of  special  importance 
is  to  be  considered  this  must  also  be  set  forth. 

The  place  is  usually — though  not  necessarily  unless  so 
specified  by  statute  or  by-laws — the  principal  office  of  the  cor- 
poration within  the  state  of  incorporation.  (See  §  303.)  In 
the  absence  of  conflicting  provisions,  special  meetings  may  be 
called  to  meet  at  any  reasonable  place  in  the  discretion  of  the 
party  or  parties  issuing  the  call. 

The  time  at  which  the  meeting  is  to  be  held  must  be 
reasonable,  and  must  be  definitely  stated,  both  day  and  hour 
being  given.  The  particular  business  to  be  transacted  must 
be  specified  with  reasonable  detail,  and  ordinarily  no  other 
business  may  be  transacted  at  such  special  meeting. 

§  307.     Notice  of  Special  Meetings 

When  a  call  in  due  form  for  a  special  meeting  of  direc- 
tors is  handed  to  the  secretary,  it  is  his  duty  to  send  out  notices 
of  the  meeting  thereby  authorized.  These  notices  are  sent  in 
such  manner — usually  by  mail  or  telegraph — and  at  such 
time  before  the  meeting  as  is  prescribed  by  the  by-laws,  or 
otherwise  as  will  under  ordinary  conditions  permit  the  attend- 
ance of  all  the  members  of  the  board.® 

The  by-laws  also  frequently  prescribe  that  no  business  save 
that  specifically  set  forth  in  the  call  and  notice  shall  be  con- 
sidered or  acted  upon  at  such  special  meetings.  If  not  so 
prescribed,  a  notice  specifying  time  and  place,  but  not  the  busi- 
ness to  be  transacted,  is  sufficient  to  authorize  all  ordinary  cor- 
porate business.^  It  is  otherwise  if  important  or  unusual  busi- 
ness is  to  be  transacted  at  the  special  meeting.^ 

When  the  by-laws  do  not  prescribe  the  specific  details  of 


« People  V.  Albany  Medical  College,  :^  Hun  (N.  Y.)  348  (1882) ;  Ashley  Wire 
Co.  V.  Illinois  Steel  Co.,  164  111.  149  (1896);  Stockton,  etc.,  Works  v.  Houser,  109 
Cal.    I    (189s). 

"^  In  re  Argus  Co.,  138  N.  Y.  557  (1893);  Ashley  Wire  Co.  v.  Illinois  Steel  Co., 
164  111.    149   (1896). 

'  Mercantile  Library  Hall  Co.  v.  Pittsburg,  etc.,  Assoc,  173  Pa.  St.  30  (1896). 


MEETINGS    OF   DIRECTORS  335 

notice,  both  its  time  and  manner  must  be  reasonable.  Just 
what  constitutes  reasonable  notice  of  special  meetings  of  direc- 
tors is  a  matter  on  which  judicial  decisions  vary,  and  should 
therefore  be  settled  by  express  by-law  provision.  (  See  Chap- 
ter LXXII,  "Notices  of  Meetings.") 

It  is  always  presumed  that  notice  duly  mailed  with  post- 
age prepaid  to  the  last  known  address  of  each  member  of  the 
board  is  received  by  the  party  addressed.  It  is,  however, 
usually  provided  in  the  by-laws  that  notice  given  in  this  man- 
ner shall  be  sufficient.  When  this  is  done,  it  is  immaterial 
whether  or  not  the  notice  is  actually  received.^  Notice  by 
postal  card  is  sufficient  when  this  method  of  notification  is 
customary.  Any  irregularity  in  call  or  notice  may  be  cured 
by  a  ratification  of  the  special  meeting  or  of  the  business 
transacted  thereat  at  a  subsequent  regular  meeting  of  the 
board,  or,  if  all  the  members  are  present  at  and  participate 
in  a  special  meeting,  this  in  itself  cures  any  defect  in  call  or 
notice.^*^  Unless  cured  in  some  way,  failure  to  give  notice  to 
any  one  director  invalidates  the  action  of  a  special  meeting." 

§  308.     Call  and  Waiver  of  Notice 

The  call  and  waiver  of  notice  of  a  special  meeting  of  direc- 
tors is  merely  a  call  for  the  meeting  combined  with  a  waiver 
of  the  usual  formalities  of  notice.  This  must  be  signed  by 
every  member  of  the  board,  but  when  so  signed  authorizes  a 
meeting  to  be  held  at  the  time  and  place,  and  for  the  trans- 
action of  the  business  specified  therein.  Whenever  the  mem- 
bers of  the  board  are  readily  accessible,  the  call  and  waiver 
is  the  preferable  method  of  assembling  special  meetings.  (See 
Form  55.) 

»  Ashley  Wire  Co.  v.  Illinois  Steel  Co.,  164  III.  149.  i59  (1896) ;  Haj  v.  Amer.  Bottle 
Co.,   182  111.   App.  636,  641    (1913.). 

^  Minneapolis  Times  Co.  v.  Nimocks,  53  Minn.  381  (1893) ;  Chase  v.  Tuttle,  55 
Conn.  455  (1888). 

"People  V.  Batchelor,  22  N.  Y.  128  (i860);  Relley  v.  Campbell,  134  Cal.  175 
(1901) ;  Broughton  v.  Jones,  120  Mich.  462  (1S99) ;  Hill  v.  Coal  Co.,  1119  Mo.  9 
(1893). 


336  MEETINGS   AND    RECORDS 

§309.     Consent  Meetings 

If  all  the  members  of  the  board  of  directors  are  gotten 
together  or  find  themselves  together,  and  all  agree  to  hold 
a  special  meeting,  it  may  be  held  then  and  there,  and  any  de- 
sired business  transacted  thereat  without  further  formality. 
Such  a  meeting  is  usually  termed  a  "consent  meeting,"  and  in 
New  York  and  some  few  other  states  is  recognized  by  statute 
law.  Elsewhere  such  a  meeting  is  valid  under  the  common 
law.''    (See  Form  56.) 

§  310.     Opening  Directors'  Meetings 

At  the  time  appointed  for  the  meeting,  the  president  of 
the  corporation — or  the  chairman  of  the  board,  if  such  official 
exists — or  in  his  absence  the  vice-president,  calls  the  meeting 
to  order.  Should  these  officers  be  absent,  the  next  ranking 
officer  of  the  corporation,  if  a  member  of  the  board,  presides. 
Should  such  officer  be  the  secretary,  he  should  merely  call  the 
meeting  to  order,  and  then  request  some  other  member  of  the 
board  to  act  as  chairman,  or,  if  objection  is  made,  the  appoint- 
ment should  be  effected  by  motion. 

If  no  officer  of  the  corporation  who  is  also  a  member  of 
the  board  is  present,  it  is  proper  for  any  member  of  the  board 
in  attendance  to  call  the  meeting  to  order,  and  in  the  absence 
of  objection  ask  some  one  to  act  as  chairman.  If  there  is 
objection,  the  appointment  should  be  made  by  means  of  a  mo- 
tion. 

No  formal  roll-call  of  a  directors'  meeting  is  usual,  the 
secretary  merely  noting  the  names  of  those  present,  which 
names  are  later  entered  on  the  minutes.  If  there  is  no  quorum, 
business  may  not  be  transacted  at  that  session,  but  the  meet- 
ing may  adjourn  from  day  to  day,  if  desired,  until  a  quorum 
is  secured. 


"Minneapolis   Times    Co.    v.    Nimocks,    53   Minn.    381    (1893);    Bank    of   Nat.    City 
V.  Johnston,  60  Pac.  Rep.  776  (1900), 


MEETINGS    OF    DIRECTORS  337 

Formal  submission  of  proof  of  notice  of  a  directors'  regu- 
lar meeting  is  not  necessary  unless  called  for  by  the  president 
or  some  member  of  the  board.  The  secretary  should,  however, 
preserve  a  copy  of  the  notice  sent  out  and  indorse  upon  it  the 
fact  that  it  was  duly  mailed  on  the  date  given  thereon  to  the 
last  known  address  of  each  member  of  the  board. 

In  the  case  of  special  meetings  of  directors  the  call  and 
notice,  or  call  and  waiver  of  notice  as  the  case  may  be,  should 
be  submitted  to  the  meeting  and  be  entered  on  the  minutes  in 
full  with  a  statement  of  the  circumstances.  The  matter  is  of 
importance,  as  the  due  call  of  the  meeting  with  sufficient  notice 
to  each  member  is  absolutely  essential  to  its  legality. 

At  a  regular  meeting  of  directors  the  order  of  business  as 
set  forth  in  the  by-laws  is  followed,  unless  set  aside  by  formal 
motion  or  unanimous  consent.  At  a  special  meeting  it  is  but 
seldom  applicable. 

§311.     Quorum 

The  number  required  for  a  quorum  at  directors'  meetings 
should  be  fixed  by  the  charter  or  by-laws. ^^  In  New  York 
this  cannot  be  a  number  less  than  one-third  of  the  fulP*  mem- 
bership of  the  board.  Where  there  is  no  provision  in  the  char- 
ter or  by-laws,  the  common  law  prevails,  and  a  majority  of 
the  whole  board  is  necessary  for  a  quorum.^^  A  majority  of 
the  board  in  this  connection  is  a  majority  of  the  whole  number 
constituting  the  board,  and  not  of  some  reduced  number  re- 
sulting from  vacancies  or  removals.^®  A  majority  of  a  quo- 
rum can  decide  any  question  properly  brought  before  the 
meeting.^^ 

Directors  cannot  vote  by  proxy  at  directors'  meetings,  but 


"Hoyt  V.  Thompson's  Ex.,  19  N.  Y.  207  (1859);  Craig  Medicine  Co.  v.  Mer- 
chants'  Bank,  59   Hun   (N.   Y.)   561   (1891). 

^*  N.  Y.   Gen.   Corp.   Law,   §  34- 

15  Wells  V.    Rubber  Co.,   19  N.  J.   Eq.  402   (1869). 

18  Moore  v.   Rector,  4  Abbott's  N.    Gas.   (N.   Y.)   5.1   (1873.). 

"N.  Y.  Gen.  Corp.  Law,  §43;  Wells  v.  Rubber  Co.,  19  N.  J.  Eq.  402  (1869); 
Foster  v.  Mill  Co.,  93  Mo.  79  (1887). 


338  MEETINGS   AND    RECORDS 

must  be  personally  present  in  order  to  act  thereat.^*  No  legal 
authority  exists  for  permitting  directors  to  vote  or  to  be  con- 
sidered as  present  when  merely  connected  by  telephone,  nor 
for  permitting  an  absent  member  to  sign  the  minutes  of  the 
directors'  meeting  and  be  counted  present,  though  any  action 
so  taken  may  be  validated  by  action  at  a  subsequent  meeting 
where  a  quorum  is  really  present. 

A  director  cannot  legally  vote  at  directors'  meetings  on  a 
matter  in  which  he  is  personally  interested,  nor  is  such  action 
usually  valid  if  he  is  counted  to  make  a  quorum  when  such  a 
question  is  put  to  vote.^^ 

§312.     Reading  the  Minutes 

As  a  matter  of  due  parliamentary  procedure,  any  unap- 
proved minutes  of  preceding  directors'  meetings  should  be  read 
and  approved  or  be  otherwise  disposed  of  at  a  regular  meet- 
ing of  directors  before  any  other  business  is  considered.  If, 
however,  time  is  pressing,  the  president  sometimes  directs  that 
the  reading  of  the  minutes  be  dispensed  with,  or  the  same  end 
is  accomplished  by  formal  motion. 

The  minutes  of  stockholders'  meetings  are  never  read  at 
directors'  meetings  unless  as  a  matter  of  information  or  by 
special  request,  nor  if  read  would  their  approval  by  the  board 
be  of  any  legal  effect.  The  minutes  of  any  preceding  board 
meeting  should  not  be  approved  at  a  special  meeting  unless  the 
approval  of  such  minutes  was  specifically  mentioned  as  one 
of  the  purposes  of  the  meeting.     (See  §  322.) 

§313.     Reports 

At  a  regular  meeting,  after  disposal  of  the  minutes,  the 
president  takes  up  the  next  order  of  business  and  calls  for 
reports  from  officers  first,  and  then  from  committees,  if  any 


'•"Perry  v.  Oil  Co.,  93  Ala.  ^  (1890);  State  v.   Perkins,  90  Mo.  App.  603.  (1901). 
» Curtin   v.    Salmon    River    Co.,    130  Cal.    34S   (1900) ;    Miller   v.    Crown    Perfumery 
Co.,  57  Misc.   (N.   Y.)  383  (1908);  Jacobson  v.   Brooklyn  Lumber  Co.,   184  N.   Y.   isa 


(1906). 


MEETINGS    OF    DIRECTORS  339 

are  to  report.  When  a  report  is  made  it  may  be  disposed  of 
by  motion,  or,  if  there  are  no  objections,  the  president  himself 
may  direct  that  the  report  be  received  and  filed.  A  verbal 
report  does  not  require  any  formal  disposal,  the  secretary  re- 
porting its  substance  in  the  minutes  as  a  matter  of  course. 

§314.     Unfinished  and  New  Business 

The  business  of  a  special  meeting  is,  as  a  rule,  all  new 
business.  It  is  set  forth  in  both  the  call  and  notice,  and  may 
be  presented  by  the  presiding  officer,  or  he  may  call  on  the 
secretary  or  some  member  of  the  board  for  its  introduction. 

At  regular  meetings  of  directors  it  usually  rests  with  the 
secretary  to  bring  up  any  matters  of  unfinished  business. 
New  matters  requiring  attention  are  brought  up  by  the  presi- 
dent or  by  any  member  interested. 

The  election  of  ofBcers  does  not  appear  upon  the  regular 
order  of  business,  as  it  takes  place  but  once  a  year.  It  there- 
fore comes  under  the  head  of  **New  Business,"  and  at  the 
proper  meeting  may  be  taken  up  at  any  suitable  time  when 
new  business  is  under  consideration.  Usually  the  by-laws  pro- 
vide that  the  election  of  officers  shall  be  held  at  the  first  direc- 
tors' meeting  after  the  annual  meeting  of  stockholders. 

Officers  are  usually  elected  by  ballot  though  in  the  ab- 
sence of  express  provision  the  board  may  follow  any  method 
that  will  secure  a  fair  expression  of  the  wishes  of  its  members. 

When  the  board  is  agreed  as  to  who  are  to  be  elected, 
time  is  frequently  saved  by  instructing  the  secretary  to  cast 
the  single  ballot  of  the  meeting  for  the  recited  list  of  officers. 
Or  a  mere  motion  unanimously  carried  that  the  named  persons 
be  respectively  appointed  to  the  specified  offices,  is  legally  suf- 
ficient. The  election  of  officers  by  the  board  is  sometimes 
held  to  be  more  in  the  nature  of  an  appointment  than  of  an 
election.'" 


estate  V.   Kupferle,  44  Mo.    154   (1869). 


240  MEETINGS   AND    RECORDS 

Unless  otherwise  specified  by  the  by-laws  or  prevented  by 
conditions,  the  officers-elect  may  at  once  begin  the  discharge  of 
the  duties  of  their  respective  offices.  Frequently  the  newly 
elected  president  and  secretary  take  charge  of  the  meeting  im- 
mediately after  the  result  of  the  election  has  been  announced. 

A  person  cannot  be  made  an  officer  against  his  will.^^  Ac- 
ceptance of  the  position  to  which  an  officer-elect  has  been 
appointed  is  therefore  necessary.  This  may  either  be  expressed, 
or  be  indicated  by  the  performance  of  the  duties  of  his  office, 
or  even  by  his  failure  to  decline  the  office  when  properly  noti- 
fied of  his  election  thereto. ^^ 

§315.     Adjournment 

When  the  business  of  a  meeting  has  been  finished,  or  when 
for  any  reason  the  board  cannot  longer  continue  in  session,  an 
adjournment  should  be  taken,  either  sine  die,  which  terminates 
the  meeting  absolutely,  or,  if  important  business  is  left  un- 
finished, to  some  specified  future  date. 

A  meeting  adjourned  to  some  future  time  is  on  reassem- 
bling legally  regarded  as  a  continuation  of  the  original  meet- 
ing, may  transact  any  business  that  could  have  been  transacted 
at  the  original  meeting,  and  does  not  necessarily  require  any 
notification  to  the  members  of  the  board.^^ 

Standing  Committees 

§  316.     Procedure  at  Meetings 

The  general  rules  governing  the  meetings  of  a  standing 
committee  are  the  same  as  those  for  meetings  of  the  board. ^ 
Special  meetings  must  be  duly  notified  to  every  member  of  the 

»  Blake  v.   Bayley,  82  Mass.   53,1    (i860). 

23  Danville,  etc.,  Co.  v.  Brown,  90  Va.  340  (1893);  Lockwood  v.  Nat.  Bank,  9  R. 
I.  308  (1869). 

"  Smith  V.  Law,  21  N.  Y.  296  (i85o) ;  Western  Imp.  Co.  v.  Bank,  103  Iowa  455 
(1897)- 

»*Met.  Tel.  Co.  v.  Domestic  Tel.  Co.,  44  N.  J.  Eq.  568  (1888);  McNeil  v, 
Chamber  of  Commerce,  154  Mass,  z'^y  (1891), 


MEETINGS   OF   STANDING   COMMITTEES  341 

committee  unless  waived  by  formal  agreement  or  by  the  pres- 
ence of  every  member  at  the  meeting.  Actions  taken  at  meet- 
ings of  the  committee  should  be  expressed  by  means  of  duly 
adopted  motions  or  resolutions,  and  careful  minutes  of  all 
proceedings  should  be  kept  in  a  minute  book  provided  for  the 
purpose,  and  not  in  the  minute  book  of  the  directors.  The 
committee  proceedings  should  from  time  to  time  be  reported  to 
the  board,  either  by  direct  report  or  by  submission  of  the  com- 
mittee minutes. 

Unless  otherwise  expressly  provided,  the  majority  of  any 
standing  committee  constitutes  a  quorum,  and  a  majority  of 
that  quorum  has  power  to  act.^^ 


» Burleigh  v.    Ford,   6i    N.    H.   360    (1881) ;   State  v.   Jersey  City,  27  N.   J.   L.  493 
(1859);  McNeil  V.  Boston  Chamber  of  Com.,  1154  Mass.  ^^^  (1891). 


CHAPTER   XLII 

MINUTES   OF  MEETINGS 

§  317.     The  Corporate  Books 

The  financial  records  of  a  corporation  are  much  the  same 
as  those  of  a  firm  or  individual.  Some  of  their  entries  and 
accounts  are  peculiar  to  the  corporation  but  the  books  do  not 
differ  from  those  of  any  other  form  of  business  organization. 
(See  §  329.) 

The  more  important  books  of  record  peculiar  to  the  cor- 
poration are  the  minute  book,  the  stock  certificate  book,  the 
transfer  book,  and  the  stock  book  and  stock  ledger,  all  of  which 
are  kept  by  the  secretary  of  the  corporation. 

§  318.     The  Minute  Book 

The  minute  book  of  a  corporation  properly  kept  is  legal 
evidence  of  the  proceedings  of  its  stockholders'  and  directors' 
meetings.  The  secretary  is  its  custodian  and  its  entries  should 
be  made  by  him  alone.  Any  director  has  the  right  to  inspect 
this  book  at  any  suitable  time.  A  stockholder  usually  does 
not  have  this  right. 

The  minute  book  is  ordinarily  a  blank  book  of  the  style 
termed  "record"  by  stationers.  It  may  be  had  at  any  price 
from  plainly  bound  books  at  50  cents  or  less,  up  to  elaborately 
bound  and  specially  printed  books  costing  from  $5  to  $25 
or  even  more.  A  reasonably  good  and  substantially  bound 
book  is  always  to  be  desired. 

The  minute  book  varies  in  size  and  general  form  accord- 
ing to  the  taste  or  requirements  of  the  secretary.  A  common 
and  convenient  form  is  8j^  x  13  inches.    Sometimes  the  book 

342 


MINUTES    OF    MEETINGS  343 

is  specially  made,  of  a  size  and  style  to  match  the  other  cor- 
porate records.  For  a  small  corporation  with  few  meetings, 
a  book  containing  100  pages  will  usually  be  found  amply 
sufficient. 

When  the  minutes  are  kept  in  a  substantially  bound  vol- 
ume with  longhand  entries  succeeding  each  other  in  regular 
order,  later  additions  or  insertions  are  difficult  if  not  impos- 
sible, and  their  evidence  as  to  proceedings  at  the  company's 
meetings  is  difficult  to  controvert. 

Minutes  are,  however,  not  infrequently  written  with  the 
typewriter  on  sheets  of  thin  paper,  which  are  then  pasted 
in  the  minute  book.  Also  at  times  loose-leaf  minute  books  are 
employed,  in  which  the  pages  may  be  removed  and,  after  the 
minutes  are  written  upon  them,  be  reinserted  in  the  book. 
When  either  of  these  plans  is  followed,  substitutions  and 
alterations  in  the  minutes  may  be  made  with  comparative  ease 
and  their  value  as  evidence  is  diminished. 

To  avoid  this  objection  to  the  convenient  loose-leaf  minute 
book,  each  page  is  sometimes  water-marked  with  its  proper 
number  in  such  manner  that  substitution  is  extremely  difficult 
and  practically  impossible.  The  same  end  is  sometimes  ac- 
complished by  the  inscription  of  the  president's  and  secretary's 
signatures  or  initials  on  each  page,  making  substitution  with- 
out the  participation  of  these  officials  impossible.  It  is  obvious 
that  this  latter  method  of  verification  may  also  be  effectively 
employed  when  minutes  are  pasted  into  the  minute  book. 

§  319.     Contents  of  Minute  Book 

A  copy  of  the  company's  charter  or  certificate  of  incor- 
poration is  usually  entered  on  the  first  pages  of  the  minute 
book.  This  may  be  a  copy  certified  by  the  Secretary  of 
State,  bound  or  pasted  into  the  book,  or,  equally  sufficient,  a 
careful  and  legible  copy  written  in  the  book  by  the  secretary, 
or,  if  written  on  separate  sheets,  bound  or  pasted  into  the 


344 


MEETINGS   AND    RECORDS 


mijiute  book.  If  the  copy  is  made  by  him,  the  secretary  usually 
certifies  to  its  correctness. 

Following  the  charter  come  the  by-laws  of  the  company. 
These  begin  at  the  top  of  the  next  right-hand  page  and  should 
also  be  a  careful  and  legible  copy,  or  a  copy  bound  or  pasted 
in,  followed  by  the  secretary's  certificate  as  to  the  accuracy 
of  the  transcription. 

A  few  pages  immediately  following  the  by-laws  should 
be  left  blank  for  the  entry  of  any  amendments.  Then  follow 
the  minutes  of  the  first  meeting  of  stockholders  closely  fol- 
lowed by  the  proceedings  of  the  first  meeting  of  directors,  and 
thereafter  the  minutes  of  stockholders'  and  directors'  meet- 
ings in  due  sequence  as  held,  each  with  its  distinctive  heading. 
Each  meeting  should  begin  at  the  top  of  its  proper  page  and 
no  blank  pages  should  be  left  between  the  records  of  the 
different  meetings. 

In  the  larger  corporations  separate  minute  books  are  pro- 
vided for  stockholders'  and  directors'  minutes  and  also  for  the 
minutes  of  standing  committees.  In  the  smaller  corporations 
a  single  minute  book  will  usually  suffice. 

§  320.     Form  and   Subject  Matter  of   Minutes 

The  secretary  should  spare  no  pains  to  secure  accuracy 
in  his  minutes  as  they  are  the  legal  evidence  of  the  proceedings 
of  the  meetings  recorded  and  the  authority  for  any  action  of 
the  officers  required  thereby. 

The  minutes  given  in  the  present  volume  (Chapter 
LXXVI)  are  in  conventional  form.  Any  clear  statement  of 
the  proceedings  is,  however,  legally  sufficient,  though  a. reason- 
ably close  adherence  to  the  conventional  arrangement  is  de- 
sirable. 

It  is  usual  to  enter  on  the  minutes  of  directors'  meetings 
the  names  of  those  present.  Save  in  the  case  of  very  small 
corporations,  this  is  not  customary  nor  necessary  in  the  case 


MINUTES    OF   MEETINGS 


345 


of  stockholders*  meetings.  The  secretary  should,  however, 
preserve  the  lists  (Form  103)  showing  the  names  of  stock- 
holders present  at  meetings. 

During  the  progress  of  meetings,  letters,  reports,  and 
other  instruments  are  frequently  presented.  When  of  im- 
portance, the  secretary  is  usually  instructed  to  enter  these  upon 
the  minutes.  If  not  instructed,  he  may  use  his  discretion. 
If  the  matters  to  which  they  relate  are  important,  they  should 
usually  be  spread  upon  the  minutes,  i.e.,  entered  in  full.  Gen- 
erally, however,  it  is  sufficient  if  the  instruments  be  filed  and 
preserved,  such  reference  being  made  to  them  in  the  minutes 
r.3  the  conditions  may  demand. 

When  reports  or  other  instruments  are  ordered  spread 
upon  the  minutes,  the  secretary  may  usually  exercise  his  dis- 
cretion as  to  whether  they  shall  be  included  in  the  body  of 
the  minutes  or  follow  immediately  after  them.  If,  however, 
the  motion  or  order  directs  that  the  instrument  follow  the 
minutes,  or  that  it  appear  in  the  body  of  the  minutes,  the 
secretary  should  comply  with  the  letter  of  his  instructions. 

§321.     Recording  the  Procec'Iing^ 

The  corporate  minutes  arc  r.  record  of  C2  transactions  of 
corporate  meetings — a  record  of  what  13  dene,  i:ot  of  what 
is  said;  and  the  record  should  usually  be  as  ccnzioC  and  accu- 
rate as  possible. 

If  a  motion  or  resolution  13  passed  upon  at  a  :"ccting, 
no  matter  whether  adopted  or  rejected,  Its  disposition  should 
be  recorded,  but,  speaking  generally,  the  debate  and  discus- 
sion should  not  be  set  down,  nor  are  the  names  of  the  parties 
by  whom  minor  motions  or  resolutions  are  made  or  seconded 
of  sufficient  importance  to  be  entered,  nor  need  any  record 
be  made  of  those  voting  for  or  against  any  such  matter. 

It  may  be  said  further  that  when  the  presiding  officer 
decides  that  a  motion  or  a  resolution  is  properly  before  the 


346  MEETINGS   AND    RECORDS 

meeting  and  puts  it  to  vote,  the  fact  that  the  names  of  the 
parties  who  moved  and  seconded  it  or  who  voted  for  or 
against  it  are  not  recorded,  does  not  afTect  the  force  of  the 
corporate  action.  If,  however,  a  motion  or  a  resolution  is  of 
importance,  or  is  contested,  or  of  such  a  nature  that  it  may 
thereafter  be  of  importance  to  know  by  whom  the  matter  was 
introduced  and  by  whom  it  was  favored  and  opposed,  the 
record  should  be  made  in  full. 

It  sometimes  happens  that  a  stockholder  or  a  member 
opposing  some  proposed  action  wishes  his  objections  or  pro- 
test recorded  in  the  minutes.  If  his  objections  are  pertinent 
and  not  too  lengthy,  this  should  usually  be  permitted,  but 
the  secretary  should  not  enter  any  such  objections  upon  his 
record  unless  so  directed  by  a  vote  of  the  meeting  or  by  un- 
opposed direction  of  the  presiding  officer. 

The  objecting  member  sometimes  files  his  protest  in  writ- 
ing and  in  such  case  the  document  should  be  received  and 
filed  in  the  usual  course  of  business,  and  this  fact  be  noted 
in  the  minutes.  In  some  cases  it  is  necessary  for  a  member 
of  the  board  to  have  the  dissent  to  proposed  action  noted  in 
order  to  avoid  liability.  In  such  case  he  has  a  right  to  demand 
its  entry  upon  the  minutes,  and,  if  refused,  may  force  its 
entry  by  proper  legal  procedure. 

Motions  are  not  usually  entered  verbatim.  It  is  sufHcient 
if  their  sense  is  preserved.  Resolutions  are,  however,  more 
formal  and  should  usually  be  entered  in  the  exact  form  in 
which  they  are  adopted.  (See  Chapter  LXXIV,  'Torms  of 
Motions  and  Resolutions.")  The  presiding  ofKicer  of  the 
meeting  may  always  require  resolutions  and  important  mo- 
tions to  be  reduced  to  writing  before  consideration,  and  if  he 
does  this  the  work  of  the  secretary  is  greatly  lightened. 

All  papers  presented  to  or  used  at  meetings  should  be 
filed  for  future  reference  in  the  custody  of  the  secretary  unless 
otherwise  ordered. 


MINUTES    OF   MEETINGS 


347 


Notes  of  the  proceedings  are  taken  as  the  meeting  pro- 
gresses, and  these  should  be  written  up  in  permanent  form  as 
soon  after  the  meeting  as  possible  while  the  events  are  fresh 
in  the  secretary's  mind.  Should  he  delay  the  final  entry  of 
his  record  unduly,  doubt  may  arise  as  to  whether  the  secre- 
tary's notes,  or  the  record  of  the  minute  book  is  the  original 
entry,  and  if  it  should  be  held  that  the  formal  minutes  are  not 
the  original  entry,  their  value  as  evidence  is  destroyed.  If 
minutes  are  used  as  evidence,  the  secretary  will  be  asked  when 
he  wrote  up  his  final  record. 

As  soon  as  the  minutes  are  duly  entered  in  the  minute 
book,  they  should  be  signed  with  the  official  signatures  of  the 
secretary  and  the  presiding  officer  of  the  meeting,  the  secre- 
tary usually  signing  at  the  right  and  the  presiding  officer  at 
the  left. 

§  322.     Approval  and  Amendment  of  Minutes 

Minutes  should  be  approved  by  the  body  whose  proceed- 
ings they  record.  The  approval  of  stockholders*  minutes  by 
the  board  of  directors  is  absolutely  ineffective  as  is  also  the 
approval  of  directors'  minutes  by  the  stockholders,  save  by 
way  of  indorsement  or  ratification  of  the  directors'  action  re- 
corded therein. 

The  minutes  of  a  stockholders'  annual  or  special  meeting 
cannot  be  approved  at  a  subsequent  special  meeting  unless 
such  approval  is  noted  in  the  call  and  notice,  but  the  minutes 
of  any  preceding  stockholders'  meetings,  whether  annual  or 
special,  may  always  be  approved  at  the  stockholders'  annual 
meeting.  Likewise  the  approval  of  the  minutes  of  a  directors' 
regular  or  special  meeting  at  a  subsequent  special  meeting  is 
effective  if  such  approval  was  duly  notified  as  one  of  the  pur- 
poses of  the  meeting,  while  any  unapproved  minutes  of  direc- 
tors' meetings  may  always  be  approved  at  a  regular  meeting 
of  directors. 


348  MEETINGS   AND   RECORDS 

The  minutes  of  a  stockholders'  meeting  are  usually  not 
passed  upon  until  the  following  annual  meeting,  when  all 
unapproved  minutes  should  be  read  and,  if  no  objections  are 
offered,  approved.  Directors'  minutes  likewise  are  usually 
approved  only  at  regular  meetings.  The  approval  of  minutes 
relieves  the  secretary  of  all  direct  responsibility  for  the  accu- 
racy of  their  record  and  also  serves  as  a  ratification  of  the 
proceedings  recorded  therein.^ 

When  minutes  are  approved,  no  record  need  be  made  save 
the  statement  in  the  minutes  of  the  meeting  then  in  progress 
that  the  minutes  of  the  previous  meeting  or  meetings,  giving 
their  dates,  were  read  and  approved.  Usually,  however,  for 
convenience  the  secretary  also  notes  at  the  bottom  of  each  set 
of  approved  minutes  the  proper  facts  as  "Approved  at  the 
annual  meeting  of  stockholders  held  January  lo,  191 7." 

If  corrections  of  minutes  are  ordered,  the  minutes  of  the 
meeting  then  in  session  should  show  exactly  what  corrections 
were  directed  and  in  what  minutes.  In  the  corrected  minutes 
the  alteration  should  appear  in  red  and  a  marginal  note  should 
give  the  date  of  the  meeting  at  which  such  correction  was 
directed.  Red  lines  :r.ey  be  drawn  through  any  part  ordered 
stricken  out  and  any  correction  be  interlined,  but  no  erasure 
should  be  made  in  any  case,  a:  the  corrected  minutes  should 
show  both  the  crr^r  and  the  correction. 

Sometimes  it  liappcns  thr.t  those  present  at  a  meeting 
decide,  contrary  to  the  facts,  that  the  secretary  has  made 
errors  in  his  record  of  a  preceding  meeting,  and  move  that  a 
portion  of  the  minutes  be  stricken  out  or  corrected.  Whether 
right  or  v/rong,  if  the  majority  of  those  present  at  the  meet- 
ing vote  in  favor  of  the  motion,  the  secretary  must  carry  it 
into  effect.  In  such  case  he  should  draw  red  lines  through 
the  part  ordered  stricken  out  and  interline  in  red  any  matter 


*  Delano  v.  Trustees,  138  Mass.  63  (1884) ;  County  Court  v.  Ry.  Co.,  35  Fed.  Rep. 
161  (1888D. 


MINUTES    OF    MEETINGS  34CI 

ordered  inserted,  and  make  the  proper  entry  in  the  margin  of 
the  minutes.  This  then  shows  the  whole  matter;  that  the 
record  was  made  in  one  way,  and  was  at  a  hitcr  date  ordered 
changed.  The  minutes  of  the  m.eeting  at  which  such  change 
was  ordered  should  also  give  a  complete  statement  of  the 
matter. 

§  323.     "Cut  and  Dried  Minutes" 

The  annual  meeting  of  stockholders  is  frequently  held  In 
a  locality  distant  from  the  residence  of  the  parties  really  in 
interest,  as  for  instance  the  meetings  of  the  non-resident  cor- 
porations of  New  Jersey,  Maine,  and  many  other  states, 
which  must  be  held  wathin  the  state  of  incorporation.  Also 
there  are  many  corporations  in  which  the  whole  or  the  greater 
part  of  the  stock  is  held  by  combinations  and  the  subordinate 
corporations  hold  only  such  meetings  as  are  essential  to  main- 
tain their  legal  existence.  In  these  and  in  many  other  cases 
the  only  necessity  for  meetings  is  to  give  the  proper  legal 
expression  to  matters  that  are  already  determined,  and  it  is 
possible  to  write  out  the  entire  minutes  in  advance. 

The  proceedings  at  such  meetings  are  simple.  A  control- 
ling interest,  usually  in  the  shape  of  proxies,  is  sent  or  taken 
to  the  place  of  meeting.  If  the  regular  officers  are  not  present 
or  are  not  authorized  to  act,  officials  for  the  meeting  are  ap- 
pointed at  the  time  by  those  holding  these  proxies.  The  pre- 
pared minutes  are  then  read  and  agreed  to,  the  meeting  is 
adjourned,  and  the  accepted  minutes,  signed  by  the  ofHcials 
who  acted  at  the  meeting,  are  returned  to  the  secretary  of  the 
company  and  preserved  in  his  minute  book. 


Part  X — The  Treasurer 


CHAPTER   XLIII 

DUTIES  AND  POWERS  OF  THE  TREASURER 

§  324.     General 

The  duties,  powers,  and  liabilities  of  the  treasurer  as  one 
of  the  officers  and  directors  of  the  corporation  will  be  found 
in  earlier  chapters  dealing  generally  with  the  duties  and  lia- 
bilities of  the  officers  and  directors.  The  present  chapter  and 
those  following  deal  with  those  duties  and  liabilities  which 
belong  more  particularly  to  the  office  of  treasurer  alone. 

§  325.     The  Treasurer's  Primary  Duty 

The  treasurer  is  the  official  custodian  of  the  corporate 
funds,^  and  his  primary  duty  is  to  receive  them,  care  for  them, 
and  disburse  them.  Other  duties  assigned  to  him  are  usually 
in  some  way  connected  with,  or  related  to,  this  primary  duty. 

§326.     The  Treasurer's  Authority 

The  by-laws  are  almost  invariably  the  source  from  which 
come  both  the  powers  and  the  duties  of  the  treasurer.  Statutes 
rarely  specify  his  duties.  In  New  Jersey,  Pennsylvania,  and 
a  few  other  states  the  treasurer  is  required  by  statute  to  give 
a  bond,  and  in  Pennsylvania  the  treasurer  must  keep  the 
moneys  of  the  corporation  in  a  separate  book  account  to  his 
credit  as  treasurer;  but,  broadly  speaking,  the  whole  matter 
of  the  treasurer's  duties  is  left  to  the  discretion  of  the  cor- 


*  Laurel  Springs  Land  Co.  v.  Fougeray,  57  N.  J.  Eq.  318  (1898). 


DUTIES   AND    POWERS  351 

poration.  In  New  York,  New  Jersey,  and  some  other  states 
where  the  statutes  permit  special  charter  provisions,  the  treas- 
urer's duties  may  be  specified  therein,  but  such  regulations 
properly  belong  in  the  by-laws  and  are  almost  invariably  found 
there. 

In  the  care  and  management  of  the  corporate  funds  and 
for  the  discharge  of  any  duties  connected  therewith,  the  treas- 
urer is  the  active  agent  of  the  corporation,  and  of  its  govern- 
ing body,  the  board  of  directors.  He  is  therefore  subject  to 
the  direction  of  this  board  in  all  such  matters,  except  in  so  far 
as  his  powers  and  duties  have  already  been  prescribed  by 
higher  authority. 

If  no  provision  as  to  the  powers  and  duties  of  the  treas- 
urer are  found  in  the  charter  or  by-laws  of  the  corporation, 
the  directors,  as  an  incident  of  their  general  control  of  the 
corporate  affairs,  are  fully  competent  to  determine  these  pow- 
ers and  duties  and  to  authorize  him  to  do  whatever  is  re- 
quired. 

The  treasurer  is  expected  to  inform  himself  as  to  the 
powers  and  duties  pertaining  to  his  office  and  must  look  for 
his  authority,  first,  in  the  charter  and  by-laws,  and  second,  in 
the  resolutions  of  the  board  of  directors. 

§  327.     By-Law  Provisions 

By-law  provisions  relating  to  the  treasurer  differ  in  each 
corporation,  but  the  following  by-law  extract  presents  an  ex- 
cellent synopsis  of  the  usual  duties  of  the  treasurer: 

Section  5.     The  Treasurer 

The  Treasurer  shall  have  the  custody  of  and  be  re- 
sponsible for  all  moneys  and  securities  of  the  Company; 
shall  keep  full  and  accurate  records  and  accounts  in 
books  belonging  to  the  Company,  showing  the  transac- 
tions of  the  Company,  its  accounts,  liabilities,  and  finan- 
cial conditon,  and  shall  see  that  all  expenditures  are 


352  THE    TREASURER 

duly  authorized  and  are  evidenced  by  proper  receipts 
and  vouchers.  He  shall  deposit,  in  the  name  of  the 
Company,  in  such  depositary  or  depositaries  as  are  ap- 
proved by  the  Directors,  all  moneys  that  may  come  into 
his  hands  for  the  Company  account.  His  books  and 
accounts  shall  be  open  at  all  times  during  business 
hours  to  the  inspection  of  any  Director  of  the  Company. 

The  Treasurer  shall  also  indorse  for  ccllecticn  or 
deposit  all  bills,  notes,  checks,  and  other  negotiable  in- 
struftients  of  the  Company;  shall  pay  out  mcnfy  as  may 
be  necessary  in  the  transactions  of  the  Company,  either 
by  special  or  general  direction  of  the  Board  of  Direc- 
tors, and  on  checks  signed  by  the  President  and  himself, 
and  shall  generally,  together  with  the  President,  have 
supervision  of  the  finances  of  the  Company. 

He  shall  also  make  a  full  report  cf  the  financial 
condition  of  the  Company  for  the  annual  meeting  of  the 
stockholders,  and  shall  make  such  other  reports  and- 
statements  as  may  be  required  of  him  by  the  Board  of 
Directors  or  by  the  laws  of  the  State. 

He  shall  give  bond  in  the  sum  cf  five  thousand  dol- 
lars, with  sureties  satisfactory  to  the  Board  of  Direc- 
tors, for  the  faithful  performance  of  his  duties  and  for 
the  restoration  to  the  Company,  in  event  of  his  death, 
resignation,  or  removal  from  ofiice,  cf  all  books,  papers, 
vouchers,  money  and  other  property  belonging  to  the 
Company  that  may  have  ccme  into  his  custody.  He 
shall  receive  such  compensation,  net  exceeding  eighteen 
hundred  dollars  per  annum,  as  ma}^  be  fixed  by  the 
Board  of  Directors. 

By  these  provisions  the  treasurer  is  given  entire  custody 
and  charge  of  the  corporate  moneys  and  securities,  though  not 
of  the  general  property  belonging  to  the  company.  These  pro- 
visions could  be  extended  to  cover  other  property,  if  desired. 

In  the  by-laws  of  the  larger  corporations  it  is  usually 
though  not  invariably  the  case  that  the  powers  and  duties  of 
the  treasurer  are  specified  in  much  detail.  The  follovring  pro- 
vision, defining  the  powers  and  duties  of  the  treasurer,  is 


DUTIES    AND    POWERS  353 

taken  from  the  by-laws  of  the  United  States  Steel  Corpora- 
tion: 

Section  7.  Powers  and  Duties  of  Treasurer.  The 
treasurer  shall  have  custody  of  all  the  funds  and  securi- 
ties cf  the  Company  which  may  have  come  into  his 
hands;  when  necessary  or  proper  he  shall  indorse  on 
behalf  of  the  Company,  for  collection,  checks,  notes,  and 
other  obligaticns,  and  shall  deposit  the  same  to  the  credit 
cf  the  Company  in  such  bank  or  banks  or  depositary  as 
the  Board  of  Directors  or  the  Finance  Committee  may 
designate ;  he  shall  sign  all  receipts  and  vouchers  for 
payments  made  to  the  Company;  jointly  with  such  other 
Cilicer  as  may  be  designated  by  the  Finance  Committee, 
he  chall  sign  all  checks  made  by  the  Company,  and 
shall  pay  out  and  dispose  of  the  same  under  the  direc- 
tion of  the  Board  or  of  the  Finance  Committee;  he  shall 
sign  with  the  president,  or  such  other  person  or  persons 
as  may  be  designated  for  the  purpose  by  the  Board  of 
Directors  or  the  Finance  Committee,  all  bills  of  ex- 
change and  promissory  notes  of  the  Company;  he  may 
sign,  with  the  president  or  a  vice-president,  all  certifi- 
cates of  shares  in  the  capital  stock;  whenever  required 
by  the  Board  of  Directors  or  by  the  Finance  Committee, 
he  shall  render  a  statement  of  his  cash  account ;  he  shall 
enter  regularly,  in  books  of  the  Company,  to  be  kept  by 
him  for  the  purpose,  full  and  accurate  account  of  all 
moneys  received  and  paid  by  him  on  account  of  the 
Company;  he  shall,  at  all  rcascnable  times,  exhibit  his 
books  and  accounts  to  any  director  cf  the  Company  upon 
applicaiicii  at  the  office  cf  t!:e  Company  during  business 
hours;  and  he  shall  perform  all  acts  incident  to  the 
pcsition  cf  treasurer,  subject  to  the  ccntrcl  cf  t'lc  BcaM 
cf  Directors  cr  of  the  Finance  Com.mittee. 

He  s!:all'give  a  bend  for  the  faithful  discharge  01 
his  duties  in  such  sum  as  t:!c  Beard  cf  Directors  cr  the 
Finance  Committee  may  require. 

As  will  be  noted,  the  treasurer  is  subordinated  to  tlic  board 
of  directors  and  to  the  finance  committee.     In  the  present  in- 


354 


THE    TREASURER 


stance  he  is  still  further  held  in  check  by  another  by-law  provi- 
sion subjecting  him  to  removal  without  cause  at  the  pleasure 
of  the  directors.  Under  such  circumstances,  it  is  not  prob- 
able that  the  treasurer  will  lightly  oppose  the  wishes  or  instruc- 
tions of  the  directors. 

In  the  same  by-laws,  Article  V,  Section  8,  provision  is 
made  for  assistant  treasurers  as  follows : 

"Section  8.  ,  Assistant  Treasurers.  The  Board  of 
Directors  or  the  Finance  Committee  may  appoint  an  as- 
sistant treasurer  or  more  than  one  assistant  treasurer. 
Each  assistant  treasurer  shall  have  such  powers  and  shall 
perform  such  duties  as  may  be  assigned  to  him  by  the 
Board  of  Directors,  or  by  the  Finance  Committee." 

The  by-law  provisions  relating  to  the  treasurer  are  simpler 
in  the  smaller  corporations.  The  following  are  usual  provi- 
sions : 

The  Treasurer  shall  have  the  custody  of  all  moneys 
and  securities  of  the  Company,  and  shall  keep  regular 
books  of  account  and  balance  the  same  each  month.  He 
shall  sign  or  countersign  such  instruments  as  require 
his  signature,  and  shall  perform  all  other  duties  incident 
to  his  office  or  that  are  properly  required  of  him  by 
the  Board  of  Directors. 

The  Moneys  of  the  Company  shall  be  deposited  in 
the  name  of  the  Company  in  such  bank  or  trust  company 
as  the  Board  of  Directors  shall  designate,  and  shall  be 
drawn  only  by  check  signed  by  the  Treasurer  and  coun- 
tersigned by  the  President  of  the  Company. 

§  328.     Director's  Resolutions 

The  directors  ordinarily  cannot  change  the  provisions  of 
the  by-laws  as  to  the  powers  and  duties  of  the  treasurer ;  but 
they  are  generally  required,  as  in  the  examples  of  by-laws 
given  in  the  preceding  section,  to  supplement  them  by  designat- 
ing the  depositary  of  the  corporate  funds,  and  by  prescribing 


DUTIES   AND    POWERS 


355 


any  other  working  details  which  may  be  necessary  and  do  not 
conflict  with  the  by-law  provisions. 

In  a  few  states  the  directors  either  have  power  under  the 
statute  to  make  and  alter  the  by-laws,  or  may  be  given  such 
power  in  the  certificate  of  incorporation  itself.  When  this  is 
the  case  the  directors  are  enabled  thereby  to  exercise  complete 
and  unquestioned  control  over  the  corporate  officials. 

§  329.     Books  of  Account 

The  treasurer  has,  as  a  matter  of  course,  charge  of  the  cor- 
porate books  of  account.  In  the  smaller  corporations  he  is 
usually  either  acting  bookkeeper  or  has  direct  control  of  the 
books  of  account  and  keeps  his  own  special  books  as  well.  A 
knowledge  of  bookkeeping  and  of  the  financial  duties  connected 
with  his  office  is  then  a  necessary  qualification.  In  the  larger 
corporations  the  treasurer's  duties  do  not  usually  include  the 
details  of  accounting.  These  devolve  upon  subordinate  em- 
ployees, or  are  perhaps  relegated  to  an  accounting  department, 
leaving  the  treasurer  free  to  devote  his  attention  to  the  gen- 
eral oversight  and  management  of  the  corporate  finances  and 
financial  affairs. 

In  many  of  the  larger  corporations  the  actual  duties  of 
the  treasurer  are  nominal,  the  usual  duties  of  that  official  being 
assigned  to  other  officers  or  employees  of  the  corporation.  The 
treasurer  is  then,  as  a  rule,  selected  because  of  his  financial 
responsibility  or  connections,  or  for  other  reasons  that  make 
his  election  desirable. 

§  330.     Assumption  of  Official  Duties 

The  procedure  and  formalities  when  the  newly  elected 
treasurer  assumes  the  duties  of  his  office  are  simple.  Usually 
he  is  required  to  give  bond,  and  this  must  be  done  in  accord- 
ance with  the  requirements  of  the  particular  corporation  be- 
fore he  may  enter  upon  the  duties  of  his  office.    As  soon,  how- 


356 


THE    TREASURER 


ever,  as  he  has  quahfied  for  his  position  by  giving  a  satisfac- 
tory bond  and  complying  with  any  other  requirements  of  the 
corporation,  he  is  ready  and  entitled  to  take  possession  of  his 
office  and  begin  the  discharge  of  his  official  duties. 

The  retiring  treasurer,  on  the  other  hr.nd,  retains  his  posi- 
tion as  treasurer  of  the  corporation  and  has  authority  to  per- 
form all  its  usual  duties  until  the  treast:rcr-elect  has  qualified 
and  assumed  the  duties  of  his  ofilce.  Then,  liowevcr,  the  au- 
thority of  the  retiring  treasurer  immediately  terminates,  l:c 
is  no  longer  competent  to  exercise  any  of  the  functions  of  the 
ofiice,  and,  unless  othcrv/ise  instructed  by  the  board,  m.ust  at 
once  turn  over  to  the  ncv;  official  all  corporate  property  in 
his  custody,  including  the  books  of  accou.nt. 

The  retiring  treasurer,  in  preparation  for  the  surrender  of 
his  office,  usually  closes  his  books  and  prepares  a  balance  sheet, 
giving  a  more  or  less  complete  statement  of  the  general  finan- 
cial condition  of  the  corporation.  Also  an  audit  of  his  accounts 
is  customary  and  decirable,  particularly  v;hen  the  corporate 
assets  are  material. 

The  audit  of  the  retiring  treasurer's  books  relieves  the  in- 
coming treasurer  from  any  responsibility  as  to  their  condition. 
He  takes  them  as  they  are,  but  m/ust  assure  himself  that  the 
corporate  funds  and  other  property  turned  over  to  him  by 
the  retiring  treasurer  accord  with  the  books.  If  he  does  not, 
his  negligence  in  the  matter  may  render  him  liable  for  any 
resulting  loss  to  the  corporation. 

The  incoming  treasurer  should  at  once  notify  the  deposi- 
tories in  which  the  corporate  funds  are  held  of  his  election  and 
assumption  of  office.  If  the  corporate  funds  have  been  de- 
posited in  the  name  of  the  treasurer  of  the  corporation,  it 
will  be  necessary  for  them  to  be  transferred  to  the  treasurer- 
elect  by  check  of  the  retiring  official.  If,  however,  the  funds 
are  deposited  in  the  corporate  name,  no  such  transfer  is  neces- 
sary.   There  is  then  no  change  in  their  ownership  but  merely 


DUTIES    AND    POWERS 


357 


a  change  in  the  ofiicer  by  whom  checks  arc  drawn,  and  proper 
certification  to  the  bank  of  this  change  is  all  that  is  required. 
(See  Form  171.)  Should  the  outgoing  treasurer  refuse  to 
turn  over  to  the  treasurer-elect  any  property  which  belongs  to 
the  corporation,  the  directors,  or  even  the  treasurer  himself, 
may  bring  suit  for  its  recovery.  As  a  matter  of  course,  the 
treasurer  should  give  his  predecessor  a  receipt  for  the  corpo- 
rate property  turned  over. 

§331.     Formalities  on  Giving  Up  Office 

When  the  treasurer  relinquishes,  or  is  ousted  from,  his 
position,  all  properties  of  the  company  in  his  possession,  in- 
cluding the  books  of  account,  should  be  surrendered  to  his 
successor  or  to  such  other  party  as  may  be  designated  by  the 
board  of  directors.  The  incoming  treasurer  is  the  usual  and 
proper  party  to  whom  such  property  is  delivered.  The  retir- 
ing treasurer  ihould  be  given  receipts  for  all  properties  turned 
ever. 

The  corporate  accour.-.'s  arc  aUvays  the  property  of  the  cor- 
poration. Sometimes  in  the  smaller  corporations  the  books 
in  which  these  accounts  are  kept  have  been  purchased  by  the 
treasurer  personally  and  the  question  as  to  their  ownership 
then  arises.  As  a  matter  of  law,  the  treasurer  must  surrender 
the  books  in  which  the  accounts  are  kept  although  these  books 
have  been  purchased  with  his  personal  funds.  He  is  entitled 
in  such  case  to  payment  for  the  books  but  he  cannot  with- 
hold them  as  a  mer.ns  of  enforcing  this  payment  or  on  the 
plea  that  they  are  his.^ 

In  order  to  prevent  any  complications  on  this  score,  it  is 
sometimes  provided  in  the  by-laws  that  the  accounts  of  the 
company  shall  be  kept  only  in  books  that  are  the  property  of 
the  corporation. 


§306. 


State  V.    Goll,  32  N.   J.   L.  285  (1867);   High  on   Extraordinary  Legal   Remedies, 


CHAPTER   XLIV 

RELATION   OF  TREASURER  TO  OTHER  CORPO- 
RATE AUTHORITIES 

§  332.     To  the  Stockholders 

The  treasurer  is  the  agent  of  the  corporation  but  under 
the  usual  corporate  arrangements  his  direct  responsibility  is  to 
the  board  of  directors,  not  to  the  stockholders.  In  practice  the 
treasurer  usually  has  no  official  connection  with  the  stock- 
holders, save  perhaps  when  an  annual  or  an  occasional  special 
report  is  to  be  made,  when  dividends  are  to  be  paid,  or 
amounts  due  from  the  stockholders  to  the  corporation  are  to 
be  collected.  He  is  not  under  their  supervision  and  owes 
them  no  direct  duty.  He  must  obey  their  instructions  as  ex- 
pressed in  the  by-laws  of  the  corporation  but  this  is  the  limit 
of  their  usual  authority.  Should  they  attempt  to  compel  his 
action  by  direct  motion  or  resolution,  they  exceed  their  power 
and  the  treasurer  is  under  no  legal  obligation  to  obey. 

As  stated  in  an  early  case,  "The  individual  members  of 
the  corporation,  whether  they  should  all  join,  or  each  act 
separately,  have  no  right  or  power  to  intermeddle  with  the 
property  or  concerns  of  the  bank,  or  call  any  officer,  agent  or 
servant  to  account,  or  discharge  them  from  any  liability."^ 

§  333-     To  the  Board  of  Directors 

Speaking  generally,  the  treasurer  is  directly  responsible  to 
the  directors  and  must  obey  their  instructions.  Occasionally, 
however,  the  charter  gives  him  certain  specified  powers  and 


1  Smith  V.  Hurd,  12  Mete.   (Mass).  371,  385  (1847). 

358 


RELATION   TO   CORPORATE   AUTHORITIES  359 

almost  invariably  the  by-laws  define  his  authority  and  pre- 
scribe his  duties  in  detail.  It  is  then  beyond  the  power  of 
the  directors  to  disturb  him  in  the  exercise  of  the  authority 
and  the  performance  of  the  duties  prescribed  by  these  higher 
corporate  authorities. 

For  instance,  the  charter  may  provide  that  the  treasurer 
shall  be  ex  officio,  a  member  of  the  finance  committee.  If  so, 
the  directors  cannot  deny  him  this  right  as  long  as  the  charter 
provision  remains  unchanged.  Or  the  by-laws  may,  as  is 
usual,  assign  the  custody  of  the  corporate  funds  to  the  treas- 
urer. Should  the  directors,  in  defiance  of  this  by-law  provi- 
sion, instruct  the  treasurer  to  surrender  the  corporate  funds  to 
the  custody  of  some  other  officer  of  the  company,  they  would, 
save  perhaps  in  case  of  some  special  emergency,  exceed  their 
authority  and  the  treasurer  need  not  obey  their  instructions. 
On  the  contrary,  should  he  obey  them  and  should  loss  result  to 
the  company  as  a  consequence,  the  treasurer  himself  might  be 
held  responsible. 

The  treasurer  must,  however,  obey  all  such  proper  in- 
structions of  the  directors  as  are  not  in  conflict  with  charter  or 
by-law  provisions,  or  are  intended  to  supplement  and  make 
them  effective.  In  all  such  matters  the  directors  are  entirely 
within  the  scope  of  their  powers  and  their  instructions  are  as 
binding  upon  the  treasurer  as  are  the  by-laws  themselves. 

Sometimes  also  the  directors  are  given  express  authority 
to  modify,  repeal,  or  amend  the  by-laws,  and  their  power  over 
the  official  acts  of  the  treasurer  is  then  practically  complete. 
When  this  is  the  case,  statutory  and  charter  provisions  alone 
are  superior  to  their  authority. 

It  may  be  added,  however,  that  the  powers  discussed  are 
the  powers  of  the  board  of  directors  and  not  of  the  individual 
directors  composing  the  board.  These  individual  directors 
have  certain  powers  of  their  own.  Thus,  without  special  au- 
thorization thereto,  any  member  of  the  board  of  directors 


360  THE   TREASURER 

may  inspect  the  corporate  books  at  any  reasonable  time — save 
for  purposes  hostile  to  the  corporation^ — and  may  examine 
at  his  discretion  into  the  acts  of  the  treasurer  or  of  any  other 
corporate  official,  though  he  cannot  delegate  this  official  right 
to  an  audit  company.^  Also  as  an  individual  director,  he  may 
make  such  suggestions  to  the  corporate  officials  as  he  sees  fit 
and  such  suggestions  will  naturally  have  weight. 

The  individual  director  has  not,  however,  any  power  to 
enforce  compliance  with  his  suggestions,  nor  has  he  the  right 
to  change,  censure,  suspend,  remove,  or  even  direct  an  officer 
of  the  corporation,  such  rights  and  powers  inhering  only  in 
the  board  collectively.  A  director  may  be  specially  authorized 
by  the  board  to  do  any  of  these  things  and  will  then  have  all 
necessary  power  for  its  performance,  but  he  has  no  such 
authority  by  mere  virtue  of  his  board  membership. 

The  treasurer  reports  to  the  directors  and,  as  already 
stated,  is  governed  by  their  instructions  in  all  matters  not 
specifically  covered  by  charter  or  by-law  provisions.  The  re- 
lations between  the  treasurer  and  the  board  of  directors  are 
therefore  very  close  and  are  usually  harmonious.  Both  are 
supposed  to  have  the  financial  welfare  of  the  corporation  at 
heart  and  to  be  working  together  to  advance  it,  and  it  is  but 
rarely  that  the  exact  measure  of  the  board's  authority  over  the 
treasurer,  or  of  the  treasurer's  independence  of  the  board, 
comes  into  question. 

§  334-     To  the  Finance  Committee 

Nominally  the  finance  committee  is  subject  to  the  board 
of  directors.  It  is,  however,  always  composed  of  members  of 
the  board  and  generally  of  its  best  financiers,  and  the  directors 
are  usually  and  wisely  quite  content  to  leave  the  financial 


'  Heminway  v.  Heminway,  58  Conn.  443  (1890.);  People  v.  Central  Fish  Co.,  117  App. 
Div.  (N.  Y.)  77  (1907). 

»  People  V.  Borgstede,  169  App.  Div.  (N.  Y.)  4)21  (1915) ;  People  v.  Throop,  la  Wend. 
CN.  Y.)  183  (1834). 


RELATION   TO   CORPORATE   AUTHORITIES  361 

management  of  the  corporation  entirely  in  its  hands.  The 
finance  committee  is  then  practically  the  board  of  directors 
so  far  as  the  finances  of  the  corporation  are  concerned.  The 
committee  will  naturally  report  to  the  directors  at  frequent 
intervals,  but  its  reports,  acts,  and  recommendations  are 
usually  sure  of  approval  in  advance.  In  practice,  a  finance 
committee  possessing  the  confidence  of  the  board  will  direct 
the  financial  affairs  of  the  corporation  from  year's  end  to 
year's  end  without  interference.  The  allegiance,  co-operation, 
and  obedience  the  treasurer  ordinarily  owes  to  the  directors 
is  then  transferred  to  this  committee. 

If  the  treasurer  is  a  member  of  the  board  of  directors,  he 
is  usually  also  a  member,  ex  officio,  of  the  finance  committee 
and  participates  in  its  proceedings.  If,  however,  he  is  not  a 
director,  he  cannot  be  made  an  active  member  of  the  com- 
mittee. This  is,  as  already  stated,  because  the  committee  exer- 
cises discretionary  powers  belonging  to  the  board,  which  can- 
not be  legally  conferred  upon  a  committee  composed  in  whole 
or  in  part  of  members  who  are  not  directors. 

If  the  treasurer  is  a  member  of  the  finance  committee, 
and  particularly  if  he  is  of  some  financial  ability  and  stand- 
ing himself,  the  direct  and  entire  charge  of  the  financial  affairs 
of  the  corporation  is  apt  to  be  left  in  his  hands,  the  remainder 
of  the  committee  acting  merely  in  an  advisory  capacity.  Even 
where  the  treasurer  is  not  a  member  of  the  committee,  the 
financial  matters  of  the  corporation  are  still  as  a  rule  left 
largely  to  his  care.  In  such  case  he  reports  frequently  and 
informally  to  the  committee,  either  receiving  authority  for  the 
particular  act  or  policy  under  discussion,  or  approval  of  his 
actions  in  matters  which  have  already  been  consummated. 

When  the  treasurer  has  not  sufficient  experience  and 
ability  to  conduct  the  general  financial  affairs  of  the  company 
to  this  extent,  he  works  in  close  accord  with  the  members  of 
the  finance  committee,  carrying  out  their  instructions,  con- 


362 


THE    TREASURER 


suiting  with  them  frequently,  and  at  all  times  referring  to 
them  matters  of  importance,  or  such  as  may  be  beyond  his 
immediate  authority,  ability,  or  control. 

Since  the  finance  committee  practically  takes  the  place  of 
the  board  of  directors  as  far  as  the  corporate  finances  are 
concerned,  it  usually  and  naturally  has  all  the  authority  of  the 
board  itself  over  the  treasurer.  The  matter  is,  however,  one 
that  may  be  determined  absolutely  by  the  charter  or  by-laws. 
These  usually  and  properly  prescribe  that  the  treasurer  shall 
report  to,  and  be  controlled  by,  the  finance  committee. 

The  following  by-law  provisions  define  with  much  clear- 
ness the  usual  scope  and  powers  of  the  finance  committee  and 
its  authority  over  the  treasurer.  They  are  found  under  the 
head  of  "Standing  Committees"  in  the  by-laws  quoted  from 
in  the  preceding  chapter: 

The  Finance  Committee  shall  have  general  and 
special  charge  and  control  of  all  financial  affairs  of  the 
Company,  and  shall  have  and  exercise  all  of  the  powers 
of  the  Board  of  Directors  in  such  financial  matters 
when  the  latter  is  not  in  session.  The  Treasurer  and 
the  Auditor  of  the  Company  shall  be  under  the  direct 
control  and  supervision  of  the  Finance  Committee. 

The  Finance  Committee  shall  fix  all  salaries  and 
compensation  paid  or  payable  to  officials  of  the 
Company,  except  as  otherwise  provided  in  these  by-laws 
or  fixed  by  resolution  of  the  Board  of  Directors. 

It  will  be  noted  that  the  financial  affairs  of  the  company 
are  placed  unreservedly  in  the  hands  of  the  committee  in 
the  interim  between  board  meetings ;  also  that  the  treasurer  is 
expressly  subordinated  to  its  authority. 

The  general  relation  between  the  finance  committee  and 
the  treasurer  should  be  that  of  harmonious  and  effective  co- 
operation. Both  are  working  to  the  same  end,  i.e.,  the  best 
possible  administration  of  the  financial  affairs  of  the  corpora- 
tion, and  there  should  be  no  conflict  or  friction  between  them, 


RELATION   TO   CORPORATE   AUTHORITIES  363 

§  335-     To  the  Auditor 

In  the  smaller  corporations  the  auditor  is  merely  an  occa- 
sional officer  called  in  for  the  purpose  of  investigating  and 
passing  upon  the  treasurer's  accounts.  In  such  case  his  rela- 
tion to  the  treasurer  is  temporary  and  needs  no  special  dis- 
cussion. The  treasurer's  books  are  opened  to  the  auditor,  who 
examines  them,  checks  up  their  statements,  and  reports  his 
finding  to  the  board.  The  treasurer  will,  naturally,  furnish 
any  proper  information  and  assistance  required  by  the  auditor 
in  the  course  of  this  examination  and  will  facilitate  his  work 
in  every  way. 

In  the  larger  corporations,  however,  the  conditions  are 
materially  different.  Here  the  auditor,  or  comptroller  as  he 
is  sometimes  designated,  is  one  of  the  regular  officials  of  the 
corporation  and  his  duties  and  the  relations  existing  between 
him  and  the  treasurer  depend  entirely  upon  the  respective 
duties  of  the  two  officials.  These  are  usually  set  forth  in  the 
by-laws  and  vary  in  different  corporations. 

In  the  larger  corporations  the  auditor  is  the  accounting 
officer,  taking  entire  charge  of  the  general  bookkeeping.  The 
actual  receipt,  custody,  and  disbursement  of  the  funds  and 
their  general  management  remain  with  the  treasurer.  Detailed 
records  of  these  receipts  and  disbursements  as  well  as  the 
general  accounts  of  the  corporation  are  kept  in  the  auditor's 
department,  the  treasurer's  records  also  covering  these  items 
but  in  a  less  detailed  way. 

In  some  corporations,  accounts  to  be  paid  are  authorized 
by  the  auditor,  are  approved  perhaps  by  some  other  officer,  and 
the  actual  payment  is  made  by  the  treasurer.  In  other  cases 
the  payments  are  for  all  practical  purposes  made  by  the  audi- 
tor; vouchers,  duly  signed  and  countersigned,  being  sent  out 
to  the  parties  to  whom  payments  are  due,  and  these  vouchers 
being  payable  on  presentation  to  some  designated  bank  which 
acts  for  the  treasurer.     Or  again,  the  voucher  will  be  pre- 


364  THE    TREASURER 

pared  or  passed  upon  by  the  auditor  and  perhaps  by  the  official 
in  whose  department  the  obligation  arises,  and  this  voucher 
when  signed  by  the  treasurer  becomes  a  check,  honored  upon 
presentation  at  a  designated  bank. 

The  whole  matter  is  one  of  adjustment,  varying,  as  stated, 
in  different  corporations.  In  any  case  the  auditor  and  the 
treasurer  usually  have  distinct  departments,  and,  while  their 
accounts  overlap  in  some  measure  as  to  cash  received  and  dis- 
bursed, there  is  but  little  room  for  conflict  between  them. 
Each  is  independent  of  the  other  and  exercises  functions  that 
should  be  distinct  and  so  clearly  defined  that  clashing  is  impos- 
sible. 

§  336.     To  the  Other  Officials 

The  three  essential  executive  officers  of  the  corporation 
are  the  president,  the  secretary,  and  the  treasurer.  In  the 
usual  corporate  organization  the  president  is  the  superior  offi- 
cer of  the  three,  and  is  usually  given  certain  powers  of  super- 
vision over  the  other  two. 

The  secretary  and  treasurer  are  entirely  independent  of 
each  other.  Also  their  respective  functions  are  so  distinct 
that  friction  between  them  is  unusual  and  absolutely  unneces- 
sary. In  the  smaller  corporations  the  two  offices  are  fre- 
quently and  advantageously  united  in  the  same  person. 

Between  the  president  and  the  treasurer  the  probability  of 
friction  is  much  greater.  The  president,  as  already  stated, 
is  usually  given  certain  general  powers  of  supervision  over  the 
other  corporate  officers,  and,  as  these  powers  are  rarely  de- 
fined with  clearness,  there  is  at  times  room  for  real  difference 
of  opinion  as  to  their  limits. 

Under  the  usual  by-law  provisions  the  president  has  the 
right  to  inspect  and  examine  the  books,  accounts,  and  records 
of  the  treasurer  at  any  reasonable  time.*     He  has,  however, 

*  People,  etc.  v.  Goldstein,  37  App.  Div.  (N.  Y.)  550  (1899). 


RELATION   TO   CORPORATE   AUTHORITIES 


365 


no  right  to  interfere  directly  with  the  treasurer's  actions  unless 
he  sees  some  actual  neglect  or  improper  performance  of  duty. 
In  any  such  case  it  is  his  duty  to  call  the  matter  to  the  treas- 
urer's attention.  If  the  latter  is  obviously  at  fault,  it  is  his 
duty  to  heed  the  president's  instructions.  If,  however,  there 
is  a  difference  of  opinion  between  the  two  officials  as  to 
whether  or  not  the  treasurer  is  at  fault,  the  president,  unless 
specially  empowered,  cannot  enforce  his  views  directly.  All 
he  can  do  is  to  report  the  matter  to  the  directors,  and  both 
officers  will  then  be  governed  by  the  directors'  decision. 

As  the  president  is  the  chief  executive  officer  of  the  cor- 
poration, the  treasurer  is  naturally  expected  to  confer  with 
him  on  matters  of  unusual  importance  or  difficulty  and  to  be 
guided  to  a  greater  or  less  extent  by  his  opinions  and  sug- 
gestions. The  president,  however,  as  stated,  cannot  himself 
force  the  treasurer  to  heed  his  instructions  unless  he  has  been 
given  some  special  power  in  the  matter  by  charter  or  by-law 
provisions,  or  by  action  of  the  board  of  directors. 

The  offices  of  president  and  treasurer  are  occasionally 
united  in  one  person  but  not  commonly,  as  the  respective  duties 
of  the  two  positions  are  apt  to  conflict.  Thus,  in  some  states 
the  statutes  require  the  signature  of  both  the  president  and 
treasurer  to  certificates  of  stock,  and  the  by-laws  commonly 
prescribe  a  similar  signature  for  the  corporate  checks  and 
other  instruments.  It  is  obvious  that  the  whole  purpose  of 
these  precautionary  measures  would  be  defeated  if  the  two 
offiices  were  combined. 


CHAPTER   XLV 

THE  TREASURER'S  LIABILITIES 

§  337-     The  Treasurer  as  Agent 

The  treasurer's  duty  in  regard  to  the  moneys  and  the 
property  of  the  corporation  entrusted  to  his  care,  is  that  of  an 
agent,  and  he  is  held  to  the  same  measure  of  accountabiUty. 
In  an  early  New  York  case  it  was  expressed  as  follows:  'The 
duty  of  a  treasurer  is  to  keep  the  moneys  of  his  principal  dis- 
tinct from  his  own,  and  to  be  ready  at  all  times  to  pay  over 
what  balance  he  owes  to  his  principal."     With  recogni- 

tion of  the  fact  that  readiness  to  perform  is  not  performance, 
the  learned  judge  continues,  *'and  to  pay  the  balance  on  de- 
mand."' 

In  his  duties  outside  those  relating  directly  to  the  custody 
of  the  corporate  funds  and  property,  the  treasurer  is  likewise 
acting  as  an  agent  and  employee  of  the  corporation  and  is 
liable  to  it  if  he  fails  in  the  proper  performance  of  these 
duties  as  is  any  other  agent  or  employee. 

§  338.     To  Whom  Liable 

When  liability  is  incurred  by  the  treasurer  in  connection 
with  the  duties  of  his  office,  it  is  usually  to  the  corporation 
though  it  may  be  to  the  individual  stockholders  of  the  cor- 
poration, or  even  to  individuals  outside  the  corporation.  Be- 
yond this  there  is  in  some  states  a  civil  liability  for  the  non- 
performance of  certain  duties  prescribed  by  statute,  and  in  all 
states  there  is  a  criminal  liability  for  acts  in  violation  of  the 
penal  statutes. 

1  Second  Ave.    R.    R.    Co.   v.    Coleman,   24  Barb.   300   (1857) ;    Hunter  v.    Robbins, 
117  Fed.  Rep.  920  (1902). 

366 


THE    TREASURER'S    LIABILITIES 


367 


Thus,  if  the  treasurer  loses  a  portion  of  the  company  funds 
through  careless  handling,  he  is  responsible  to  the  corporation. 
If  he  makes  an  official  report  to  the  stockholders  which  is 
false  in  some  material  respect  and  the  stockholders  act  upon 
this  false  information  and  lose  money  thereby,  the  treasurer 
is  personally  liable  to  the  individual  stockholders  by  whom 
these  losses  are  incurred.  Or  if  he  misrepresents  the  financial 
status  and  ability  of  the  corporation  to  an  outsider  in  order  to 
induce  him  to  give  credit  to  the  company,  he  is  liable  to  such 
outsider  for  any  losses  incurred  as  a  result  of  his  false  repre- 
sentations. In  many  states  if  he  fails  to  make  certain  speci- 
fied reports,  he  is  liable  to  fine.  In  all  states,  if  he  embezzles 
the  corporate  funds  or  uses  his  official  position  to  defraud,  he 
is  subject  to  a  criminal  prosecution. 

§  339.     Sources  of  Liability 

Speaking  generally,  the  treasurer  may  be  liable  for  failure 
to  perform,  or  for  the  improper  performance  of  the  duties  of 
his  office,  as  follows : 

1.  Neglect  of  or  non-performance  of  duties 

2.  Faulty  performance  of  duties 

3.  Unauthorized  acts 

4.  Illegal  acts 

§  340.     (i)  Neglect  of  or  Non-Performance  of  Duties 

As  a  rule,  the  treasurer  is  liable  for  any  loss  or  damage 
incurred  through  his  neglect  of  or  failure  to  perform  his 
duties.  Thus,  if  he  fails  to  deposit  the  corporate  funds  in  due 
time,  or  in  accordance  with  the  requirements  of  the  by-laws  or 
the  directors,  and  because  of  this  neglect  they  are  burned, 
stolen,  or  otherwise  lost,  the  treasurer  is  responsible  to  the  cor- 
poration. Or  if  money  is  due  and  the  treasurer  does  not  take 
the  necessary  steps  for  its  collection,  and  as  a  result  it  is  lost 
to  the  corporation,  he  is  again  responsible.    Or  if  he  refuses 


368  THE    TREASURER 

to  perform  his  proper  duties  and  the  corporation  is  involved 
in  losses  thereby,  he  is  responsible  to  the  corporation  for  the 
amount  so  lost. 

In  any  case  of  loss  to  the  corporation  because  of  neglect 
of  duty  on  the  part  of  the  treasurer,  the  measure  of  his  lia- 
bility is  usually  the  amount  actually  lost,  or  the  damage 
actually  sustained  in  consequence  of  such  failure  or  non-per- 
formance. He  cannot  ordinarily  be  held  liable  for  losses  in- 
directly due  to  his  failure. 

It  is  to  be  noted  that  the  liability  of  the  treasurer  for 
neglect  or  non-performance  of  his  duty  is  to  the  corporation 
and  not  to  the  individual  stockholders.  Any  action,  there- 
fore, against  the  treasurer  for  losses  incurred  by  reason  of 
his  neglect  or  failure  must  be  instituted  by  the  board  of  direc- 
tors, and  not  by  the  stockholders,  either  as  a  body  or  individ- 
ually. 

In  the  larger  corporations  and  wherever  the  value  of  the 
corporate  funds  and  property  in  the  treasurer's  hands  is  mate- 
rial, it  is  usual  to  require  him  to  give  bond  for  the  faithful 
performance  of  his  duties.  This  bond,  if  good  and  of  suffi- 
cient amount,  will  usually  cover  any  losses  occasioned  by  the 
failure  or  the  misdeeds  of  the  treasurer  and  be  an  efficient 
protection  to  the  corporation.  (See  Chapter  XLVI,  'The 
Treasurer's  Bond.") 

§  341.     (2)  Faulty  Performance  of  Duties 

The  treasurer  may  render  himself  liable  for  faulty  per- 
formance of  his  duties  as  well  as  by  neglect  of  these  duties, 
and  in  such  case  his  liability  may  be  to  outside  parties  or  to 
the  corporation.  For  instance,  if  the  treasurer  signs  a  note 
of  the  corporation,  and,  instead  of  using  the  proper  corporate 
signature,  signs  his  own  name  followed  by  the  term  "Treas- 
urer," he  will  in  some  states  and  under  some  circumstances 
make  himself  liable  as  a  principal,  although  he  had  no  inten- 


THE    TREASURER'S    LIABILITIES 


369 


tion  of  so  doing  and  was  not  expected  to  be  personally  in- 
volved.^ 

So  also,  if  the  treasurer  in  paying  some  corporate  indebt- 
edness, carelessly  draws  a  check  for  a  larger  amount  than  is 
required  and  the  excess  cannot  be  recovered  from  the  payee 
the  treasurer  is  liable  to  the  corporation  for  its  amount. 

The  liability  of  the  treasurer  from  faulty  performance  of 
duty  seldom  arises.  His  position  is  one  of  trust  and  responsi- 
bility and  the  incumbent  is  usually  experienced  in  business 
matters  and  accustomed  to  the  handling  of  funds.  Under  these 
circumstances  it  is  hardly  to  be  expected  that  he  will  err  so 
grossly  in  any  of  his  official  acts  as  to  subject  himself  to  lia- 
bility. 

§  342.     (3)  Unauthorized  Acts 

The  treasurer  is  the  agent  of  the  corporation  and  within 
the  scope  of  his  authority  can  act  for  and  bind  it.  If,  how- 
ever, he  acts  beyond  the  scope  of  his  usual  duties,  not  being 
authorized  thereto,  his  act  is  without  validity  and  the  corpora- 
tion is  not  necessarily  bound.^  Also  in  any  case  of  loss  re- 
sulting from  his  unauthorized  acts  he  is  liable  in  damages  to 
the  party  suffering  such  loss,  whether  it  be  the  corporation  or 
an  individual.  This  is  the  usual  liability  of  an  agent  exceed- 
ing his  authority.* 

For  instance,  if  the  treasurer  of  a  corporation,  not  being 
authorized  thereto,  orders  a  costly  piece  of  machinery  for  the 
use  of  his  company,  the  corporation  may  lawfully  refuse  to 
receive  it  even  though  the  order  was  accepted  by  the  manu- 
facturer on  the  supposition  that  the  treasurer  had  been  duly 
empowered  to  make  the  purchase.     In  such  case  the  maker  of 


2  Merchants  Nat.  Bank  v.  Clark  et  al.,  139  N.  Y.  3,14  (18931);  First  Nat.  Bk.  y. 
V\'anis,   ISO  N.  Y.  4.5,5  (1896). 

^  Daniele  v.  Burlington,  etc.,  Co.,  84  N.  J.  Eq.  53  (1914) ;  Jacobus  v.  James- 
town Mantel  Co.,  211   N.   Y.   154  (1914). 

*  Kroeger  v.  Pitcairn,  loi  Pa.  St.  311  (1882);  Baltzen  et  al.  v.  Nicholay,  53  N.  Y. 
467  (1873);  Taylor  v.  Nostrand,  134  N.  Y.  108  (1892). 


370 


THE    TREASURER 


the  machinery  is  the  injured  party  and  may  hold  the  treas- 
urer personally  responsible  for  any  real  loss  involved  in  the 
transaction. 

Or  should  the  treasurer,  not  being  authorized  thereto,  enter 
into  a  contract  on  behalf  of  the  corporation  to  supply  certain 
goods  at  a  low  price,  the  corporation  is  not  bound  by  his 
agreement  unless  it  ratifies  his  act,  and,  if  it  does  not,  the 
treasurer  is  liable  to  the  other  party  for  any  direct  loss. 

If,  however,  the  treasurer,  though  really  unauthor- 
ized thereto,  performs  some  act  within  the  apparent  scope  of 
his  powers,  that  is  an  act  within  the  powers  usually  incident  to 
his  office,^  or  powers  which  he  has  been  represented  to  the 
public  as  possessing,®  and  the  party  with  whom  he  deals  is 
unaware  of  the  treasurer's  lack  of  authority,  the  corporation 
is  bound  by  the  act.  If  any  loss  results,  the  treasurer  is 
liable  to  the  corporation.  For  instance,  if  the  treasurer,  hav- 
ing neither  express  nor  implied  authority  therefor,  or  perhaps 
acting  contrary  to  the  instructions  of  the  board,  enters  into 
a  contract  with  a  banking  house  to  discount  a  large  amount  of 
the  corporation  paper  at  such  an  unfavorable  time  or  under 
such  conditions  as  to  involve  a  loss,  and  the  banking  house 
supposed  the  treasurer  to  have  authority  to  make  such  contract, 
the  corporation  cannot  repudiate  the  treasurer's  action  as  un- 
authorized.^ On  the  contrary,  it  must  abide  by  the  terms  of 
the  agreement  and  its  only  recourse  is  against  the  treasurer 
and  the  measure  of  its  damages  is  the  loss  actually  involved. 

The  treasurer's  general  liability  for  unauthorized  actions 
is  well  expressed  in  the  following  quotations:  "It  is  the  first 
duty  of  an  agent,  whose  authority  is  limited,  to  adhere  faith- 
fully to  his  instructions,  in  all  cases  to  which  they  can  be  prop- 
erly applied.     If  he  exceeds  or  violates  or  neglects  them,  he  is 


^Traitel  Marble  Co,  v.  Brown  Bros.,  159  App.  Div.   (N.  Y.)  4SS,  487  (191J). 
•Culver  V.   Pocono,  etc.,  Ice  Co.,  206  Pa.  St.  481   (1903). 

'  Austrian   &   Co.   v.    Springer,  94;  Mich.  343  (1892) ;   Brown  v.   Franklin  Mut.   Fire 
Ins.  Co.,  165  Mass.  565   (1896). 


THE    TREASURER'S    LIABILITIES 


371 


responsible  for  all  losses  which  are  the  natural  consequences 
of  his  act."^  "The  cases  in  which  agents  have  been  adjudged 
liable  personally  have  sometimes  been  classified  as  follows, 
viz. :  first,  where  the  agent  makes  a  false  representation  of  his 
authority  with  intent  to  deceive ;  second,  where  with  knowledge 
of  his  want  of  authority  but  without  intending  any  fraud,  he 
assumes  to  act  as  though  he  were  fully  authorized ;  and  third, 
where  he  undertakes  to  act,  bona  fide  believing  he  has  author- 
ity, but  in  fact  has  none,  as  in  the  case  of  an  agent  acting  under 
a  forged  power  of  attorney.  As  to  cases  fairly  brought  within 
either  of  the  first  two  classes  there  cannot  be  any  doubt  as  to 
the  personal  liability  of  the  self -constituted  agent,  and  his  lia- 
bility may  be  enforced  either  by  an  action  on  the  case  for  de- 
ceit, or  by  electin-g  to  treat  him  as  principal.  While  the  lia- 
bility of  agents  in  cases  belonging  to  the  third  class,  has  some- 
times been  doubted,  the  weight  of  authority  appears  to  be 
that  they  are  also  liable."^ 

The  treasurer  may  be  liable  for  wrongfully  paid  dividends. 
(See  §  379.) 

§  343.     (4)  Illegal  Acts 

The  illegal  acts  of  which  the  treasurer  is  most  commonly 
guilty  may  be  divided  into  two  classes :  ( i )  fraudulent  acts, 
such  as  false  or  misleading  statements  or  reports  as  to  the 
property  or  financial  condition  of  the  corporation  made  or 
certified  to  by  him;  (2)  criminal  acts,  such  as  embezzlement 
of  the  funds  entrusted  to  his  charge. 

Offenses  of  the  first  class  are  not  infrequent  and  may  be 
offenses  against  individuals,  or  against  the  state.  In  case  of 
misrepresentation  to  individuals,  the  treasurer  is  liable  to  the 
parties  misled  as  is  any  agent  ^^  and  may  subject  himself  to  a 


8  Whitney  v.  Merchants'  Express  Co.,  104  Mass.  152,  154  (1870);  see  also  Wilts  v. 
Morrell.  66  Barb.    (N.   Y.)  511    (187^);  Taylor  v.   Nostrand,   134  N.   Y.   108  (1892). 

»  Kroeger  v.  Pitcairn,  loi  Pa.  St.  S".  3^7  (1882). 

10  Morgan  v,  Skiddy,  62  N.  Y.  319,  326  (1875);  Kroeger  v.  Pitcairn,  loi  Pa.  St. 
311,   3.17   (1S82). 


372"  THE    TREASURER 

criminal  liability  as  well.  In  case  of  false  representations  to 
the  state,  he  is  subject  to  special  penalties  provided  by  the 
statutes. 

False  or  fraudulent  reports  are  prohibited  by  the  laws  of 
almost  every  state  in  the  Union.  Varying  punishments  are 
imposed.  Usually  the  statutes  provide  that  a  treasurer  making 
or  concurring  in  any  representation  materially  false  in  any  of 
its  details,  shall  be  liable  to  any  individual  damaged  thereby 
to  the  amount  of  his  loss.  Frequently  a  further  and  more 
serious  penalty  is  imposed,  consisting  of  both  fine  and  im- 
prisonment. 

The  criminal  acts  of  the  treasurer  may  be  of  two  classes: 
(i)  those  inuring  to  his  direct  personal  benefit,  such  as  em- 
bezzlement of  the  corporate  funds  or  obtaining  money  under 
false  pretenses  from  the  corporation,  or  from  those  with  whom 
the  corporation  is  transacting  business;  (2)  participation  in 
acts  of  the  corporation  that  would  in  an  individual  be  criminal. 

The  liability  of  the  treasurer  for  criminal  acts  inuring  to 
his  personal  benefit  are  the  same  as  for  any  other  individual. 
Such  offenses  are  neither  better  nor  worse,  nor  does  their  pun- 
ishment differ  when  committed  by  a  corporation  official. 

If  criminal  acts  are  committed  by  the  corporation,  the 
treasurer  or  any  other  oflficer  responsible  therefor,  or  know- 
ingly assisting  or  concurring  therein,  is  liable  to  prosecution 
and  punishment."  In  such  case  it  must  be  shown,  however, 
that  "the  corporation  did  them  by  his  hand,  act,  direction  or 
permission,  which  of  course  is  direct  proof  of  his  own  acts,  or 
such  circumstances  must  be  shown  as  to  justify  the  conclusion, 
as  a  fact,  that  what  the  corporation  did,  he  did."^^  In  other 
words,  he  is  an  agent  with  an  agent*s  usual  liability  but  no 
more. 

Thus  if  the  corporation  obtains  credit  or  moneys  by  means 


"  Weber  v.   Weber,  47  Mich.  569  (188?) ;   Hubbard  v.   Weare,  79  Iowa  678  (1890. ; 


"Weber  v.    Weber,  47  Mich.  569  (i»»?; ;   Hubbard 
Vreeland  v.   N.  J.   Stone  Co.,  29  N.  J.  Eq.   188  (1878). 
"  People   V.    England,  37   Hun   139   (1882). 


THE   TREASURER'S   LIABILITIES  373 

of  false  representations,  i.e.,  under  false  pretenses,  in  order 
to  hold  the  treasurer  responsible,  either  civilly  or  criminally, 
it  must  be  shown  that  he  participated  in  such  act  or  knowingly 
allowed  it  to  be  done.^^  As  a  corporation  cannot  be  held 
criminally  liable,  and  as  it  is  far  more  difficult  to  secure  the 
criminal  conviction  of  its  officials  than  to  enforce  a  civil  lia- 
bihty,  criminal  prosecutions  against  the  treasurer  in  cases  of 
the  kind  are  exceedingly  rare.  Civil  prosecutions  are  not  so 
uncommon  and,  if  his  participation  and  responsibility  can  be 
proved,  he  is  held. 

Outside  of  false  representations,  acts  involving  criminal 
liability  are  not  often  committed  under  corporate  direction. 
Sometimes,  however,  they  do  occur,  as  where  the  agents  of  a 
corporation  resort  to  violence  or  the  destruction  of  property  in. 
order  to  hinder  or  prevent  the  success  of  a  rival  concern.  In 
any  such  case  the  corporation  itself  can  naturally  be  held  only 
in  damages,  but  the  agents,  by  whom  the  criminal  act  is  per- 
formed, are  liable  to  punishment  as  if  the  act  were  their  own 
deed,  instigated  and  committed  by  them  alone. 

§  344.     Statutory  Liabilities 

In  many  of  the  states  the  liabilities  discussed  in  the  pres- 
ent chapter,  which  in  the  main  are  common  law  liabilities,  have 
been  further  enacted  into  statutory  liabilities.  Also  in  some 
cases  specific  additional  penalties  have  been  added.  An  in- 
stance of  this  has  already  been  given  in  the  case  of  false  re- 
ports, where  the  treasurer  is  not  only  liable  to  the  individuals 
injured  by  such  false  reports,  but  is  subject  to  a  prescribed 
statutory  penalty  as  well,  this  penalty  usually  including  both 
fine  and  imprisonment. 

In  addition  to  the  common  law  liabilities,  there  are  in 
some  states  penalties  for  refusal  to  allow  the  proper  inspection 


13  VVakeman    v.    Dalley,    51    N.    Y.    27    (1872) ;    Arthur   v.    Griswold,    55   N.    Y.    400 
(1874);   Morgan  v.  Skiddy,  62  N.  Y.  319  (18751). 


374  '^HE    TREASURER 

of  books;  for  failure  to  make  certain  reports;  for  permitting 
stockholders  to  withdraw  any  part  of  their  investment  in  the 
corporation  and  for  allowing  other  impairments  of  the  capital 
stock.  Most  of  the  things  thus  penalized  are  in  themselves 
morally  indefensible. 

It  will  be  found,  however,  that  occasionally  acts  or  omis- 
sions entirely  innocent  in  themselves  have,  by  direct  statutory 
provision,  been  made  punishable  offenses.  Thus  in  some 
states  the  omission  to  file  certain  prescribed  reports  at  a  par- 
ticular time  is  punished  by  fine.  Statutory  provisions  of  this 
kind  are,  however,  not  numerous  and,  as  far  as  applicable  to 
the  treasurer  of  the  corporation,  are  restricted  almost  entirely 
to  the  corporate  reports. 


CHAPTER   XLVI 

THE  TREASURER'S  BOND 

§  345-     General 

The  corporate  funds  are  usually  placed  in  the  treasurer's 
care  with  but  little  reservation,  and,  in  the  absence  of  special 
protective  provisions,  the  measure  of  their  safety  is  the  integ- 
rity and  efficiency  of  the  treasurer.  If  he  is  dishonest,  they 
may  be  stolen ;  if  he  is  careless,  they  may  be  lost. 

The  safeguards  that  can  be  thrown  round  the  corporate 
funds  while  in  the  treasurer's  custody  are  but  few.  Usually 
he  is  required  to  deposit  them  as  soon  as  they  come  into  his 
hands,  and  their  withdrawal  may  be  effected  only  by  check 
signed  and  countersigned  as  required  by  charter,  by-laws,  or 
directors'  resolution.  Notes  and  drafts  likewise  usually  re- 
quire signature  and  countersignature.  Regulations  as  to  cor- 
porate loans,  discounts,  and  other  financial  transactions  restrict 
his  power.  Audits  of  the  treasurer's  books  are  held  from 
time  to  time.  His  character,  standing,  and  financial  responsi- 
bility always  have  much  weight. 

It  is  obvious,  however,  that  all  this  affords  but  very  par- 
tial protection  to  the  corporate  funds,  and  still  less  to  the  other 
property  entrusted  to  the  treasurer's  care.  One  further  pro- 
tective measure  of  importance  exists,  and  this  is  the  treas- 
urer's bond,  the  most  effective  and  most  relied  upon  of  all  the 
material  safeguards  possible. 

The  treasurer's  bond  is  an  instrument  whereby  the  parties 
signing  it  bind  themselves  within  the  limits  of  the  bond  to 
make  good  any  losses  the  corporation  may  suffer  from  the 
dishonest  acts  or  wilful  omissions  of  the  treasurer.  The  obli- 
gations of  the  bond  are  governed  strictly  by  its  terms,  but  the 

375 


376  THE   TREASURER 

usual  personal  bond  requires:  (i)  the  faithful  performance  of 
the  treasurer's  duties;  (2)  the  safety  of  the  corporate  funds 
and  other  property  entrusted  to  his  care;  and  (3)  their  due 
return  on  the  expiration  of  his  term  of  office,  or  at  any  prior 
time  upon  legal  demand. 

§346.     Statutory  Requirements 

In  many  states  the  statutes  are  silent  on  the  subject  of 
the  treasurer's  bond.  In  a  few  states,  notably  New  Jersey  and 
Pennsylvania,  the  statutes  require  that  the  treasurer  be  bonded 
in  such  sum  and  with  such  sureties  as  the  by-laws  provide. 
In  other  states,  as  in  New  York,  Colorado,  Delaware,  Massa- 
chusetts and  Illinois,  the  statutes  are  merely  permissive  and 
provide  that  security  may  be  demanded  of  the  treasurer.  As 
to  the  stockholders,  this  is  merely  a  restatement  of  a  power 
already  existing.  They  may,  if  they  wish,  provide  in  the  by- 
laws that  a  bond  shall  be  required  of  the  treasurer,  but  they 
might  do  this  with  equal  force  if  the  statutes  were  silent.  As 
to  the  directors,  however,  such  statutes  are  of  greater  weight, 
giving  them,  in  the  silence  of  the  by-laws,  the  unquestioned 
right  to  require  a  bond  from  the  treasurer — a  power  which 
otherwise  is  doubtful.  The  statutes  of  the  states  mentioned 
are  not,  however,  mandatory,  and,  if  the  directors  see  fit,  they 
may  omit  the  requirement  and  cannot  be  held  liable  in  case  of 
resulting  loss  to  the  corporation. 

§  347*     Corporate  Requirements 

Irrespective  of  any  statutory  provision,  the  stockholders 
have  full  power  at  common  law  to  require  the  treasurer  to 
give  a  bond.  Such  a  requirement  might  be,  and  sometimes 
is,  incorporated  in  the  charter,  but  is  usually  found  in  the 
by-laws. 

When  the  by-laws  require  a  bond,  they  will  sometimes 
specify  its  amount  and  the  number  of  sureties,  or  perhaps  pro- 


THE   TREASURER'S    BOND  377 

vide  instead  that  the  bond  of  a  reputable  surety  company  shall 
be  given.  Usually,  however,  they  merely  direct  that  a  bond 
shall  be  required  of  such  amount  and  with  such  sureties  as  the 
board  of  directors  may  prescribe.  Frequently  they  are  merely 
permissive,  stating  that  the  board  may  require  the  treasurer 
to  give  a  bond,  all  details  being  left  to  the  board. 

In  all  cases  where  the  by-laws  require  a  bond  of  the 
treasurer,  the  directors  have  full  power  to  prescribe  any  de- 
tails not  covered  by  the  by-law  provision.  Should  neither  the 
statutes  nor  the  charter  or  by-laws  of  the  corporation  require 
such  bond,  it  is  doubtful  whether  the  board  would  of  its  own 
authority  have  power  to  compel  it. 

§  348.     Nature  of  the  Bond 

The  treasurer's  bond  is  a  formal  undertaking  of  certain 
parties  who  are  specified  therein  and  by  whom  the  bond  is 
signed,  that  in  the  event  of  loss  arising  from  the  defalcation 
or  other  dishonesty  of  the  treasurer,  they  will  make  good  such 
loss  up  to  the  amount  of  their  bond.  When  such  a  bond  is 
given,  it  is  usually  signed  by  the  treasurer  and  by  his  bondsmen 
as  well,  and  in  all  cases  the  details  of  the  liability  involved 
are  set  forth  in  full  in  the  instrument. 

Formerly  personal  bonds  were  the  rule  and  the  bondsmen 
were  usually  friends  of  the  bonded  official.  Of  recent  years, 
however,  responsible  surety  companies  supply  bonds  of  the 
kind,  and  the  personal  or  individual  bond  has  been  largely 
superseded. 

The  personal  bond  is  generally  sweeping  in  its  nature, 
covering  any  loss  occasioned  by  defalcation  or  dishonesty  on 
the  part  of  the  treasurer  and  also  providing  for  the  proper 
restoration  to  the  company,  when  legally  demanded,  or  at  the 
expiration  of  the  treasurer's  term  of  office,  of  all  moneys, 
papers,  vouchers,  documents,  books  of  account,  and  other 
property  belonging  to  the  company  then  in  his  hands. 


Z7^ 


THE    TREASURER 


The  wording  of  the  bond  will,  however,  affect  and  directly 
limit  the  extent  of  the  sureties'  liability.  Usually  bondsmen 
are  not  held  liable  for  accidents  or  mistakes  of  the  principal, 
or  for  his  inability  to  perform  all  the  duties  of  his  official  posi- 
tion.^ But  where  the  condition  of  the  bond  provides  that  the 
principal  shall  perform  all  the  duties  of  his  office  and  that  the 
sureties  shall  pay  all  damages  or  losses  arising  from  any  fail- 
ure to  perform  such  duties,  the  bondsmen  may  be  held.^ 

§  349.     Amount  of  Bond 

There  is  no  rule  as  to  the  amount  of  the  treasurer's  bond. 
Manifestly  the  matter  is  one  that  must  be  governed  by  the 
conditions  of  each  special  case.  Its  amount  is  supposed  to  be 
proportionate  to  the  risk  involved,  but  frequently  it  will  be 
fixed  haphazard,  or  at  some  arbitrary  amount  deemed  suffi- 
cient, or  perhaps  the  cost  of  the  bond  will  determine  its 
amount.  In  all  cases  the  bond  should  be  adequate  to  cover  any 
loss  reasonably  possible. 

The  treasurer  of  a  corporation  is  usually  a  man  of  stand- 
ing and  character,  and  this  will  in  itself  have  a  direct  bearing 
in  fixing  the  amount  of  his  bond.  Also  he  is  frequently  of 
some  financial  responsibility  and  this  will  have  weight,  as  the 
extent  of  the  treasurer's  liability  is  not  limited  by  the  amount 
of  his  bond.  The  bond  is  merely  a  crystallization  of  a  portion 
of  his  liability  in  convenient  shape  for  ready  realization  in  case 
of  loss  for  which  he  is  responsible,  and  any  property  he  may 
own  is  available  beyond  this  in  case  the  bond  is  insufficient. 
Also  some  measure  of  safety  is  insured  by  the  usual  checks 
existing  or  placed  upon  the  treasurer's  official  actions,  i.e., 
the  general  knowledge  of  the  business  and  of  the  treasurer's 
accounts  and  affairs  possessed  by  the  directors  and  other  cor- 


1  Morris,    etc.,  .  Co.    v.    Administratrix,    21    N.    J.    L.    100    (1847);    Union    Bank    v. 
Clossey,   10  Johns   (N.  Y.)  271   (1813) ;   contra.  Am.   Bank  v.  Adams,  iz  Pick.    (Mass.) 

303  (1831). 

*  Union  Bank  v.  Thompson,  8  Rob.   (La.)  227  (1844). 


THE   TREASURER'S    BOND  379 

poration  officials,  the  accounts  required  to  be  kept,  the  peri- 
odical audits,  the  prompt  deposit  of  funds,  the  countersigna- 
tures to  checks,  notes,  drafts,  etc.,  etc. 

All  this  must  be  taken  into  consideration  as  must  also  the 
general  improbability  that,  in  event  of  the  treasurer's  neglect 
or  dishonesty,  all  the  corporate  funds  and  property  in  his  pos- 
session will  be  lost.  The  bond  is  usually  but  a  small  proportion 
of  the  amount  entrusted  to  the  treasurer's  care  when  this  is  at 
all  considerable,  and  the  ratio  diminishes  rapidly  as  the  amount 
involved  increases.  For  instance,  the  treasurer  of  some  small 
corporation  with  a  cash  balance  never  exceeding  a  few  thou- 
sand dollars,  will  frequently  be  required  to  give  a  bond  for  a 
thousand  dollars  or  more.  In  this  case  the  bond  ranges  from 
25  to  even  100  per  cent  of  the  total  risk.  In  a  large  corpora- 
tion the  percentage  would  be  relatively  much  smaller. 

Frequently,  as  stated,  the  cost  of  bonding  has  some  weight 
in  determining  its  amount.  Under  the  personal  bond  this 
element  does  not  enter  in,  but  with  the  surety  company  bond 
the  cost  increases  with  the  size  of  the  bond  and  its  amount  will 
naturally  be  kept  as  low  as  wise  prudence  will  permit.  Some- 
times, with  penny-wise  economy,  its  amount  is  fixed  still  lower. 

§  350'     Personal  Bonds 

As  already  stated,  the  bond  formerly  given  by  the  treas- 
urer was  almost  invariably  signed  by  individuals.  These  indi- 
viduals were  usually  friends  of  the  treasurer  who  went  on  the 
bond  merely  as  an  accommodation  to  him  and  without  expec- 
tation of  compensation  and  equally  without  expectation  of 
ever  being  called  upon  to  meet  its  obligations.  If,  then, 
through  the  treasurer's  fault  or  misfortune,  losses  occurred 
and  these  friends  were  called  upon  to  make  good  the  under- 
takings of  the  bond,  they  naturally  felt  the  demand  to  be  a 
hardship,  as  in  truth  it  was.  They  were  legally  liable,  but 
they  did  not  feel  the  moral  obligation  of  a  just  debt,  and 


380  THE   TREASURER 

would  therefore  delay  payment  as  long  as  possible  and  fre- 
quently evade  it  altogether,  or  perhaps  be  found  unable  to 
pay.  The  whole  system  was,  and  is,  unsatisfactory  and  in- 
effective. 

The  personal  bond  is  still  used  to  a  considerable  extent, 
and  when  it  is  employed  the  standing  of  the  treasurer's  sure- 
ties or  bondsmen  becomes  a  matter  of  the  first  importance.  It 
is  obvious  that  the  value  of  the  bond  rests  not  alone  in  the 
financial  ability  of  the  bondsmen  but  to  a  considerable  extent 
upon  their  moral  responsibility  as  well,  and  both  their  financial 
standing  and  general  character  should  therefore,  when  the 
bond  is  large,  be  subjected  to  a  searching  scrutiny.  This  is  a 
matter  entirely  within  the  province  of  the  directors.  Usually 
the  bondsmen  of  a  corporation  treasurer  are  personally  known 
to  the  directors,  and  the  desirability  of  these  bondsmen  may 
then  be  decided  from  knowledge  so  gained  without  the  neces- 
sity of  special  investigation. 

It  need  hardly  be  said  that  the  actual  drafting  of  the 
instrument  by  which  the  treasurer's  bondsmen  are  held  should 
be  careful  and  competent.  A  defective  instrument  might 
easily  result  in  a  total  loss  of  the  protection  the  bond  was  ex- 
pressly intended  to  afford.     (See  Form  195.) 

§  351.     Surety  Company  Bonds 

The  surety  company  bond  is  similar  in  its  general  nature 
to  a  personal  bond ;  its  carefully  restricted  liability  and  the  fact 
that  it  is  signed  by  a  surety  company  instead  of  by  indi- 
viduals constituting  the  only  material  difference.  The 
surety  companies  supplying  these  bonds  are  usually  well- 
known  and  substantial,  and  the  conditions  surrounding  the 
issue  of  their  bonds  are  such  as  to  make  the  security  afforded 
far  superior  within  its  limits  to  that  of  the  ordinary  personal 
bond. 

When  a  surety  company  bond  is  desired,  the  treasurer 


THE   TREASURER'S    BOND 


381 


makes  his  application  in  prescribed  form,  specifying  the 
amount  required.  The  company  then  investigates  the  char- 
acter and  standing  of  the  treasurer  to  decide  whether  he  is  a 
suitable  person  for  the  position  and  one  who  may  be  safely 
bonded.  If  he  is  accepted,  a  fee  is  paid  the  company  according 
to  the  amount  of  the  bond  and  the  nature  of  the  risk,  and  the 
bond  is  issued. 

The  treasurer's  application  to  a  surety  company  is  formal. 
It  usually  involves  a  very  complete  statement  of  his  past  his- 
tory and  present  condition,  covering  his  social  and  business 
habits,  standing,  and  connections,  and  giving  all  such  details  of 
his  earlier  and  present  life  as  will  enable  the  surety  company 
to  judge  of  his  fitness  as  a  custodian  of  money  and  property. 
The  applicant  is  also  required  to  give  a  number  of  suitable 
references,  i.e.,  people  who,  while  not  relatives,  have  been  in 
a  position  to  judge  of  the  character  and  responsibility  of  the 
applicant.  These  references  are  communicated  with  and  a 
written  statement  as  to  the  important  features  of  the  treas- 
urer's character,  reputation,  and  past  history  are,  if  possible, 
obtained  from  each.  The  investigation  is  usually  thorough 
and  searching.  If  the  applicant  passes  the  ordeal  successfully, 
the  company  issues  its  bond  in  accordance  with  his  application. 

In  the  case  of  a  corporation  treasurer,  the  surety  com- 
pany's fee  for  a  bond  of  moderate  amount — say  a  few  thou- 
sand dollars — is  from  $4  to  $7  per  annum  for  each  thousand 
dollars  of  bonded  obligation  assumed  by  the  company.  These 
fees  are  sometimes  paid  by  the  treasurer  himself  and  some- 
times by  the  corporation.  It  would  seem  proper  that  the  cor- 
poration should  assume  this  expense,  though  no  established 
rule  prevails. 

Bonding  by  a  surety  company  is,  as  has  been  said,  a  strictly 
business  transaction.  Before  taking  the  risk  the  company 
makes  a  careful  investigation  and  takes  every  proper  pre- 
caution.    Its  fees  are  based  on  careful  calculation  and  long 


382  -  THE    TREASURER 

experience  and  are  an  adequate  payment  for  the  risk  assumed. 
A  certain  percentage  of  loss  is  anticipated.  Then,  when  loss 
does  occur  for  which  the  company  is  liable  under  its  bond, 
there  is  seldom,  if  ever,  any  attempt  on  the  part  of  a  reputable 
and  responsible  surety  company  either  to  evade  or  delay  pay- 
ment of  its  obligation. 

Further,  it  may  be  said  that  the  reputation  and  financial 
standing  of  the  surety  companies  engaged  in  the  business  of 
bonding  may  be  easily  and  satisfactorily  established ;  that  there 
is  usually  neither  trouble  nor  delay  in  payment  when  unques- 
tioned obligations  arise;  that  in  case  of  doubt,  necessitating 
legal  proceedings  in  order  to  determine  whether  or  not  the 
bondsmen  are  liable,  the  courts  construe  the  bonds  given  by 
surety  companies  much  more  strictly  than  in  the  case  of  bonds 
given  by  individuals,  and,  finally,  that  in  spite  of  its  limited 
protection  and  many  conditions,  the  surety  company  bond  has 
almost  superseded  the  personal  bond. 

§  352.     Liability  of  Bondsmen 

The  contract  of  the  bondsmen  or  surety  company  is  an 
agreement  to  indemnify  the  corporation  against  loss  occurring 
through  the  defaults  of  the  treasurer.  The  treasurer  joins 
with  his  bondsmen  or  with  the  surety  company  in  signing  the 
bond.  This  is  not  for  the  purpose  of  binding  himself  to  the 
corporation,  to  which  he  already  owes  a  duty,  but  for  the 
purpose  of  obligating  himself  to  save  his  sureties  harmless. 
In  bonds  prepared  by  the  surety  companies  the  obligation  of 
the  surety  company  is  usually  made  conditional  upon  the  sign- 
ing of  the  bond  by  the  treasurer. 

If  the  bond  is  phrased  "jointly  and  severally,''  the  bonds- 
men signing  the  instrument  are  each  individually  liable  to  the 
full  amount  of  the  bond,  and  action  in  case  of  loss  may,  if 
desired,  be  commenced  against  the  treasurer  alone  or  against 
any  one  of  his  bondsmen,  or  against  any  or  all  of  the  parties 


THE   TREASURER'S    BOND 


383 


at  the  same  time.^  In  Massachusetts  suit  in  such  case  must 
be  brought  either  against  one  or  against  all  the  obligors.*  As 
among  themselves,  however,  each  one  of  the  bondsmen  is 
responsible  for  his  individual  proportion  of  any  loss  incurred 
and,  if  payment  is  enforced  from  one  bondsman,  he  is  legally 
entitled  to  collect  the  pro  rata  amount  due  from  each  of  his 
fellow  bondsmen. 

If  the  bond  is  phrased  "severally"  as  opposed  to  "jointly 
and  severally,''  then  each  bondsman  is  liable  only  for  his  pro- 
portionate amount  of  the  bond,  or  of  any  less  amount  becom- 
ing due  thereunder,  and  in  case  of  loss,  proceedings  must  be 
brought  against  each  one  of  the  bondsmen  for^his  individual 
liability.^ 

Usually  liability  of  a  personal  bond  is  limited  to  the 
amount  actually  and  directly  lost  by  the  neglect  or  dishonesty 
of  the  treasurer.  In  case  the  amount  of  such  loss  is  less  than 
the  amount  of  the  bond,  the  bondsmen  are  liable  only  for  the 
loss  actually  incurred  but  are  still  held  on  the  bond  for  any 
future  losses  and  this  liability  continues  until  the  bond  expires 
or  until  they  have  paid  out  the  full  amount  of  their  obligation 
thereunder.  If  the  loss  is  greater  than  the  amount  of  the 
bond,  the  bondsmen  are  liable  up  to  its  full  amount  but  not 
beyond,  and  upon  payment  of  its  amount  the  bond  is  extin- 
guished and  of  no  further  effect.  In  other  words,  the  amount 
specified  in  the  bond  marks  the  limit  of  the  bondsmen's  lia- 
bility. 

When  a  bond  is  once  executed  the  bondsmen  cannot  with- 
draw or  escape  from  its  liability  until  the  legal  termination  or 
prior  cancellation  of  the  bond.  They  may  have  reason  to 
suspect  the  treasurer  of  dishonesty  or  carelessness,  or  for  other 
reasons  may  greatly  desire  to  end  their  liability,  but  this  they 


*Poullain    v.    Brown,    80    Ga.    27    (1887);    McKee    v.    Griffin,    60    Ala.    427.    (1877); 
Trustees  v.    McBride,  8u  Misc.    (N.   Y.)   618   (1915)- 
<  Leonard   v.    Speidel,    104   Mass.   356   (1870). 
»  State  V.   Powers,  512  Miss,   198  (1876) ;   Brandt  on  Suretyship,   §  19^1^ 


384 


THE    TREASURER 


cannot  do  unless  with  the  consent  of  the  corporation.  They 
may  neither  cancel  their  obligation  nor  escape  it/  They  can 
only  wait  until  time  works  their  relief  or  perhaps  their  ruin. 
A  cancellation  clause  is  sometimes  inserted  in  personal  bonds, 
and  always  in  surety  company  bonds,  for  the  express  purpose 
of  its  termination,  if  desired,  before  the  end  of  the  bonded 
period. 

The  undertaking  of  a  bond  is  an  onerous  one  that  should 
not  be  entered  upon  by  individuals  as  lightly  as  is  usually  done. 
The  expectation  is,  of  course,  that  no  loss  will  occur  and  no 
active  obligation  fall  upon  the  bondsmen.  Instances  showing 
the  fallacy  of  this  expectation  are,  however,  numerous,  and 
when  liability  does  arise,  the  results  are  apt  to  be  serious — 
too  serious  to  justify  the  signing  of  a  bond  as  a  mere  matter 
of  friendship,  when  a  few  dollars  will,  as  a  matter  of  ordinary 
business,  obtain  perhaps  a  better  bond  from  a  responsible 
surety  company.  A  personal  bond  is  an  imposition  on  the 
individuals,  and  does  not  safeguard  the  corporation. 

In  case  of  doubt,  or  when  legal  proceedings  are  necessary 
to  enforce  the  liability  of  bondsmen,  the  courts,  as  already 
stated,  construe  the  bonds  given  by  surety  companies  much 
more  strictly  than  the  bonds  of  individuals.  The  leniency 
shown  the  individual  in  this  case  arises  from  the  fact  that  he 
generally  takes  no  part  in  the  writing  of  the  instrument  and 
does  not  profit  from  the  transaction.  He  is  in  fact  merely  an 
accommodation  party  and  is  therefore  entitled,  in  case  of 
doubt,  to  the  strictest  construction  in  his  favor.^ 

In  the  case  of  a  surety  company,  the  reverse  of  all  this  is 
true.  The  company  itself  prepares  the  form  of  bond,  care- 
fully investigates  and  limits  the  risk  it  assumes,  protects  itself 
in  every  particular,  and  is  paid  adequately  for  its  undertaking. 
Hence,  when  the  courts  pass  upon  such  a  contract,  their  con- 

•  Stearns    on    Suretyship,    §  119. 

■^Stearns  on  Suretyship,   §255;  Ulster  Co.   Sav.   Inst.  v.   Ostrander,  is  App.   Div, 
173  (1897);  Ward  V.   Stahl,  81   N.  Y.  4o6  (1880). 


THE   TREASURER'S    BOND  385 

struction  in  case  of  doubt  is  against  the  surety  and  in  favor  of 
the  party  seeking  indemnity.^ 

§  353-     Termination  of  Bond 

Unless  the  treasurer's  bond  contains  some  clause  provid- 
ing that  its  liability  shall  continue,  or  sooner  terminate,  it  is 
limited  to  the  term  of  office  for  which  the  treasurer  was 
elected.  If  the  treasurer  is  re-elected,  his  bond,  unless  speci- 
fically so  provided  in  the  instrument,  does  not  pass  over  to 
the  new  term  but  must  be  renewed.^  Also,  if  the  election  of 
officers  fails  and  the  treasurer  holds  over  beyond  the  elected 
term,  his  bondsmen  are  not  responsible  for  this  hold-over  term 
unless  this  continuing  responsibility  is  clearly  expressed  in  the 
bond.'*^ 

The  death  of  the  treasurer  terminates  his  bond,  as  does 
likewise  his  peremptory  or  accepted  resignation,  provided  in 
either  case  that  all  the  corporate  funds  and  other  corporate 
property  entrusted  to  him  are  returned.  Also,  if  there  is  any 
material  change  in  the  duties  and  responsibilities  of  the  treas- 
urer, the  old  bond  may  be  terminated  or  vitiated  by  the 
changed  conditions  and  a  new  bond  should  then  be  required." 
It  is  to  be  noted  that  while  the  liabilities  of  a  bondsman 
are  limited  to  losses  occurring  during  the  term  for  which  the 
bond  is  given,  the  bondsmen  are  not  released  entirely  at  the 
end  of  this  period,  but  may  still  be  held  for  any  defalcation 
or  loss  which  occurred  during  the  bonded  term,  even  though 
such  loss  were  not  discovered  until  long  after  this  term  ex- 
pired. In  other  words,  the  bondsmen  undertook  to  make  good 
certain  possible  specified  losses  if  they  occurred  during  a 
certain  specified  time,  i.e.,  during  the  treasurer's  term  of  office. 


8  Am.  Surety  Co.  v.  Pauly,  17a  U.  S.  13^  (1897);  Tarboro  v.  Fidelity  Co.,  128 
N.    C.   366  (1901). 

^  Citizens'  Loan  Assn.  v.  Nugent,  40  N.  J.  L.  2151  (1878) ;  Savings  Bank  v. 
Hunt,  72  Mo.   597  (1880) ;   Ulster  Co.    Sav.    Inst.   v.    Ostrander,   163  N.   Y.  430  (1900). 

10  Brandt  on   Suretyship,    §  191 ;    Ulster  Co.    Inst.   v.    Young,    161    N.    Y.    2%   (1899). 

*i  National,  etc.  Assn.  v.  Conkling,  90  N.  Y.  1116  (18812) ;  Smith  v,  Molleson, 
146  N.  Y.  24.1   (1896). 


386 


THE   TREASURER 


If  such  losses  do  occur,  the  mere  fact  that  they  are  not  dis- 
covered till  later  does  not  affect  the  liability  of  the  bondsmen 
one  way  or  the  other,  unless  perhaps  the  bondsmen's  liability 
is  then  barred  by  the  statutes  of  limitation,  or  some  limitation 
has  been  imposed  by  the  terms  of  the  bond.  It  has  been  held 
that  defalcations  in  three  successive  years  under  an  original 
bond  and  two  renewals  were  recoverable,  although  the  total 
amount  was  greater  than  the  liability  of  the  bond  for  any 
one  year/^ 

This  continuing  liability  is  a  disturbing  feature  of  the 
personal  bond  and  is  a  strong  reason  for  its  avoidance.  In  a 
surety  company  bond,  on  the  contrary,  this  feature  is  taken 
into  consideration  and  provided  against  by  careful  limitations. 


« Campbell   Milk   Co.   v.    U.   S.   Fidelity   &   G.   Co.,   i6i  App.   Div.    (N.   Y.)   73» 
(1914). 


CHAPTER   XLVII 

THE   TREASURER'S    REPORTS 

§  354-    The  Report  to  Directors 

In  the  smaller  corporations  the  directors  usually  keep  in 
close  touch  with  both  the  corporate  business  and  its  records, 
and  a  formal  report  from  the  treasurer  will  hardly  be  required 
more  than  once  a  year. 

In  the  larger  corporations  monthly  reports  showing  the 
condition  of  the  corporate  affairs  are  usually  required,  the 
details  and  scope  of  these  reports  depending  somewhat  on  the 
nature  of  the  corporate  business.  An  annual  report  is  also 
made  at  the  end  of  the  corporate  year,  usually  similar  in  form 
to  the  monthly  reports  but  covering  the  operations  of  the  entire 
year. 

There  should  be  no  reservations  in  the  treasurer's  report 
to  the  directors.  The  directors  are  responsible  for  the  man- 
agement of  the  business  and  should  be  fully  informed  on  every 
detail  of  the  corporate  operations  that  will  assist  them  in  the 
inteUigent  and  capable  discharge  of  this  responsibility.  Occa- 
sionally it  will  happen  that  special  transactions  are  not  divulged 
lO  the  entire  board  of  directors,  but  this  is  exceptional  and 
is  proper  only  when  the  directors  themselves  concur. 

The  treasurer's  report,  whether  monthly,  quarterly,  or 
annual,  should,  for  the  period  covered,  give  the  source  and 
amount  of  moneys  received,  the  amount  and  nature  of  dis- 
bursements, the  earnings  and  expenses,  and  the  assets  and 
liabilities  as  of  the  close  of  the  reported  period.  Any  special 
data  peculiar  to  the  particular  time  or  period,  or  of  importance 
to  the  financial  operations  of  the  corporation,  should  also  be 
embodied  in  the  treasurer's  report. 

387 


388 


THE    TREASURER 


•The  form  and  the  details  of  the  report  submitted  depend 
on  the  requirements  of  the  board  and  also  on  the  possibilities 
of  the  accounting  system.  If  profits  can  only  be  ascertained 
annually  or  semiannually  after  taking  an  inventory,  then  the 
monthly  report  cannot  embody  an  accurate  balance  sheet,  or 
a  profit  and  loss  statement.  A  summarized  statement  of  cash 
receipts  and  disbursements  can  always  be  made  and  such  sta- 
tistical data  as  gross  sales,  returns,  purchases,  etc.,  can  be 
presented  if  desired.  If  made  in  a  comparative  form,  i.e.. 
if  the  data  of  the  corresponding  year  is  also  inserted,  the 
directors  will  be  able  to  draw  some  valuable  conclusions.  Fre- 
quently, when  possible,  a  comparative  balance  sheet  is  also 
submitted  showing  the  assets  and  liabilities  as  at  the  close  of 
the  month  of  the  report. 

Usually  a  comparative  profit  and  loss  statement  is  made  up 
showing  the  earnings  and  expenses  for  the  corresponding 
month  of  the  previous  year.  The  expenses  are  not  detailed 
in  this  statement,  reference  being  made  to  the  analysis  book 
which  shows  in  comparative  form  the  detailed  expenses  of 
each  month.  This  book  should  accompany  the  report  when 
it  is  submitted  to  the  directors.  This  obviates  the  necessity  for 
detailing  all  expenses  in  the  report,  which  should  be  done  if 
an  analysis  book  is  not  kept  or  is  not  presented  to  the  board. 

The  treasurer's  annual  report  to  the  directors  should  follow 
the  general  form  of  the  monthly  report. 

§  355.     Report  to  Stockholders 

The  stockholders  compose  the  corporation  and  are  entitled 
to  information  as  to  its  condition  and  progress.  Frequently, 
however,  there  are  trade  reasons  for  withholding  the  more 
confidential  details  from  them.  It  is  obvious  that  if  a  full 
showing  of  the  corporate  business  and  the  results  of  its  opera- 
tions were  made  annually  to  the  stockholders  of  a  corporation, 
it  would  become  public  property  and  serious  results  might; 


THE   TREASURER'S   REPORTS 


389 


follow.  Primarily,  for  this  reason,  but  also  because  the  stock- 
holders do  not  need  nor  usually  desire  fully  detailed  statements 
of  the  corporate  business,  the  reports  made  to  the  stock- 
holders are  almost  always  general  in  their  character. 

The  report  to  the  stockholders  generally  takes  the  form  of 
a  statement  of  earnings  designed  to  give  a  view  of  the  com- 
pany's operations.  Sometimes  a  condensed  balance  sheet  will 
make  an  excellent  stockholder's  report.  This  may  be  accom- 
panied by  an  income  tax  statement  showing  the  earnings  for 
the  year,  and  also  by  a  condensed  general  profit  and  loss 
account.  In  miany  of  the  larger  corporations,  more  or  less 
directly  connected  matter  accompanies  the  balance  sheet.  (See 
Form  118.) 

In  many  corporations  the  treasurer  makes  no  independent 
report,  the  president's  report  covering  the  general  affairs  and 
conditions  of  the  corporation  together  with  its  finances  and 
plans  for  the  future.  This  is  true,  for  instance,  of  the  United 
States  Steel  Corporation,  where  but  one  formal  report — that 
of  the  chairman  of  the  board — is  made  to  the  stockholders.  In 
perhaps  the  majority  of  cases,  however,  the  treasurer  makes 
his  own  report  to  the  stockholders,  covering  in  it  such  details 
of  the  financial  affairs  of  the  corporation  as  the  directors  deem 
it  expedient  for  the  stockholders  to  know;  or,  to  express  it 
otherwise,  all  such  financial  details  as  will  be  of  interest  to 
the  stockholders,  the  publication  of  which  will  not  result  in 
injury  to  the  company's  business. 

Where  but  one  formal  report  is  made  to  the  stockholders 
and  this  report  is  made  by  the  president,  the  treasurer  or  the 
treasurer's  department  will,  of  course,  supply  the  president 
with  material  for  the  financial  portion  of  the  statement.  In 
any  case,  the  two  officials  should  work  in  sufficiently  close 
touch  to  prevent  any  serious  overlapping  of  their  reports.  (See 
Form  117.) 


Part  XI — The  Corporate  Finances 


CHAPTER   XLVIII 

THE  CORPORATE  FUNDS 

§  356.     General 

"Corporate  funds"  is  a  general  term  applied  to  the  moneys 
belonging  to  the  corporation.  Technically,  the  term  "funds'* 
includes  securities  as  well  as  moneys,  but  used  in  connection 
with  the  treasurer's  work  it  is  customary  to  restrict  its  applica- 
tion to  cash,  sight  drafts,  checks,  and  similar  readily  con- 
vertible paper.  The  general  corporate  securities,  such  as 
notes,  time  drafts,  treasury  stock,  bonds,  securities  of  other 
corporations,  etc.,  are  also  usually  committed  to  the  treasurer's 
care  but  not  under  the  designation  "funds,"  the  provisions 
regulating  the  matter  usually  employing  the  phrase  "money 
and  securities,"  in  order  to  avoid  any  uncertainty  as  to  their 
scope. 

§  357-     Collections 

Whether  the  treasurer  is  responsible  for  the  collection  of 
moneys  due  the  corporation  or  not,  is  a  matter  determined 
entirely  by  the  requirements  or  practice  of  the  particular  cor- 
poration. 

In  the  smaller  corporations  collections  falling  due  in  the 
ordinary  course  of  business  are  within  the  usual  province  of 
the  treasurer:  In  the  larger  corporations  they  are  not.  In 
these  all  moneys  as  received  are  turned  over  to  the  treasurer, 

390 


THE    CORPORATE    FUNDS  391 

but  his  responsibility  as  to  collections  is  limited  to  such  special 
collections  as  may  be  specifically  assigned  to  him. 

§  358.     Status  of  Treasurer  as  to  Corporate  Funds 

In  receiving  and  holding  the  corporate  moneys  the  treas- 
urer acts  as  the  agent  of  the  corporation.  He  must  therefore 
safeguard  them  with  all  reasonable  care,  and  use  them  only 
on  account  of  and  for  the  benefit  of  the  corporation  and  in  ac- 
cordance with  its  instructions.  So  long  as  he  acts  within 
these  limits,  he  is  not  responsible  for  any  losses  which  may 
occur.  ^ 

If,  however,  the  treasurer  fails  to  use  reasonable  care  in 
his  custody  of  the  corporate  funds,  i.e.,  the  care  that  a  prudent 
man  of  business  would  exercise  in  regard  to  his  own  funds,  he 
will  be  liable  for  any  resulting  losses.  Also,  if  he  disburses, 
uses,  or  invests  the  corporate  funds  without  authority,  he  is 
again  liable  if  losses  result,  but,  should  gains  be  made,  these 
gains  belong  to  the  corporation.  In  other  words,  any  profits 
resulting  from  the  use  of  the  corporate  funds  while  in  the 
treasurer's  care,  belong  to  the  corporation  regardless  of 
whether  such  use  be  proper  or  improper.  If  losses  result  from 
proper  use  of  the  funds  the  loss  is  the  corporation's;  but  if 
the  use  be  improper,  the  loss  is  the  treasurer's. 

This  same  rule  holds  good  where  the  treasurer  privately 
employs  corporate  funds  for  his  own  benefit  or  account.  If 
the  transaction  is  discovered,  the  corporation  can  reclaim  not 
only  its  funds  but  any  resulting  profits  as  well.  If  losses  occur, 
the  treasurer  can  be  required  to  make  these  good  and  in  addi- 
tion, in  either  case,  is  liable  to  prosecution  for  embezzlement. 

Such  a  condition  occasionally  occurs  where  the  cashier  or 
treasurer  of  an  institution  uses  its  funds  for  speculative  pur- 
poses, expecting  to  replace  the  borrowed  funds  from  the  re- 
turns of  the  venture,  while  any  profits  are  to  be  retained  as  hia 


First  Nat.   Bank  v.  Bank,  77  N.  Y.  320  (1879). 


392  THE    CORPORATE    FINANCES 

own  private  gain.  Usually  no  profits  are  made  and  the  dis- 
covery of  the  transaction  involves  the  defaulting  treasurer  in 
disgrace  and  punishment.  If,  however,  profits  should  be  made, 
these  profits  are  the  property  of  the  corporation  and,  if  re- 
tained by  the  treasurer,  his  offense  is  two-fold.  Not  only  has 
he  used  and  risked  the  corporate  funds  improperly,  but  he  has 
stolen  the  resulting  profits. 

§  359-    Custody  of  Corporate  Funds 

The  treasurer's  responsibility  for  the  corporate  funds 
begins  as  soon  as  they  are  turned  over  to  him  and  continues 
until  they  are  surrendered  to  his  successor  or  to  some  other 
properly  authorized  party. 

Usually  the  cojporate  authorities  designate  a  depository 
and  require  the  treasurer  to  deposit  the  corporate  funds  there- 
in. If  not,  it  would  still,  as  a  rule,  be  the  duty  of  the  treasurer 
to  deposit  in  a  reputable  bank  the  moneys  coming  into  his 
hands,  as  an  incident  of  the  "reasonable  care"  properly  re- 
quired of  him. 

Just  how  soon  funds  should  be  deposited  after  their 
receipt  is  a  matter  to  be  decided  by  conditions.  Usually  a  rou- 
tine for  handling  the  corporate  moneys  and  securities  is  estab- 
lished and  the  treasurer  is  governed  by  its  rules. 

In  the  absence  of  any  express  provision  or  custom  requir- 
ing daily  deposits,  small  amounts  of  money  might  properly  be 
held  until  a  convenient  time  for  depositing  them,  particularly 
if  there  were  a  suitable  safe  or  vault  at  the  treasurer's  disposal 
in  which  such  funds  could  be  kept.  If,  however,  material 
amounts  of  money  were  received  by  the  treasurer  during  bank- 
ing hours,  he  would  ordinarily  be  grossly  negligent  if  they 
were  not  deposited  the  same  day.  If  received  after  banking 
hours,  they  should  be  kept  in  the  safest  place  at  his  command 
until  they  can  be  deposited  on  the  next  banking  day.  The 
temporary  receptacle  for  such  funds  would  naturally  be  the 


THE    CORPORATE    FUNDS  393 

safe  or  vault  used  by  the  corporation  for  the  preservation  of 
its  books,  papers,  and  other  valuables.  Should  the  treasurer 
place  his  funds  elsewhere,  a  very  clear  and  satisfactory  ex- 
planation of  his  reasons  for  so  doing  would  be  necessary  to 
save  him  from  liability  in  case  of  any  resulting  loss. 

In  the  larger  or  more  active  corporations  considerable 
amounts  of  money  are  often  kept  over  from  day  to  day  in  the 
various  funds  or  for  special  purposes,  but  they  are  kept  under 
such  conditions  of  safety  as  to  render  the  risk  negligible.  Also, 
as  this  is  done  with  intent,  and  with  the  knowledge  and  con- 
sent of  all  parties  concerned,  the  treasurer  is  not  liable  even 
though  losses  occur. 

The  general  rule  that  the  corporate  funds  should  be  de- 
posited promptly  applies  particularly  in  the  case  of  checks. 
The  check  is  merely  an  order  for  money  and,  if  the  treasurer 
accepts  this  order  and  does  not  present  it  promptly  for  pay- 
ment, he  is  himself  liable  for  any  loss  occasioned  by  the  delay.^ 

§360.     Disbursement  of  Corporate  Funds 

The  disbursement  of  the  corporate  funds  is  usually  made 
under  carefully  prescribed  conditions,  and  the  treasurer  can 
hardly  incur  liability  in  the  exercise  of  this  duty  save  as  a 
result  of  gross  negligence  or  downright  fraud. 

Usually  the  by-laws  provide  that  the  corporate  funds  shall 
be  paid  out  by  the  treasurer  in  accordance  with  the  instruc- 
tions of  the  directors,  and  also  prescribe  the  exact  signature  to 
the  checks  by  means  of  which  payments  are  made,  and  require 
that  the  treasurer  shall  take  all  proper  receipts  and  vouchers. 
If  the  by-laws  are  silent,  the  directors  have  full  power  to 
make  such  rules  as  to  disbursements  as  they  deem  proper. 

If  neither  by-laws  nor  directors'  resolutions  make  any  pro- 
vision as  to  the  details  of  disbursements,  the  treasurer  may 


2  Smith   V.    Miller,   40    N.    Y.    176    (1870);    First   Natl.    Bank   v.    Bank,    ti   N,    Y. 
3>ao  C1879). 


394 


THE   CORPORATE   FINANCES 


then  use  his  discretion  and  need  only  observe  the  rules  of  ordi- 
nary business.  These  would  undoubtedly  require  that  pay- 
ments of  importance  be  made  by  check  whenever  reasonably 
possible,  and  that  receipts  or  vouchers  be  taken  for  all  moneys 
paid  out. 

In  no  event  has  the  treasurer  authority  to  make  payments 
on  his  own  initiative.  The  matter  is  one  that  belongs  to  the 
directors  alone  and  the  treasurer  has  no  right  either  to  make  a 
payment  without  their  authorization  or  to  refuse  a  payment 
when  it  has  been  directed  by  them. 

The  payments  of  corporate  funds  customarily  made  by  the 
treasurer  in  practice  without  specific  authorization  are  not  in 
violation  of  this  rule.  Occasionally  he  will  in  an  emergency 
or  for  special  reasons,  pay  accounts  without  authorization  of 
any  kind,  but  he  then  relies  upon  the  acquiescence  or  express 
ratification  of  the  directors.  (See  §  117.)  Usually,  however, 
his  payments,  when  not  specifically  authorized,  are  made  un- 
der blanket  instructions  empowering  the  payment  of  large 
amounts  made  up  of  numerous  small  items.  Or,  perhaps,  cer- 
tain routine  obligations,  as  the  pay-roll  at  the  end  of  each 
week,  will  be  paid  as  a  matter  of  course  under  the  implied 
authority  of  custom. 

The  treasurer's  responsibility  for  the  correctness  and 
validity  of  accounts  paid  depends  upon  the  conditions.  If  bills 
are  ordered  paid  by  the  directors,  the  treasurer  ordinarily 
has  no  responsibility  in  the  matter  save  for  their  proper  pay- 
ment, unless  he  is  aware  of  doubtful  or  fraudulent  circum- 
stances connected  with  these  accounts  not  known  to  the  direc- 
tors. If,  however,  under  a  general  authorization  he  pays 
accounts  which  later  prove  to  be  false  or  fraudulent,  he  might 
be  held  for  any  resulting  loss.  To  escape  it  he  must  show 
that  he  was  unaware  of,  and  could  not  have  been  reasonably 
expected  to  discover,  the  fraudulent  nature  of  the  accounts. 
(See  Chapter  XLV,  "The  Treasurer's  Liabilities.") 


THE    CORPORATE    FUNDS  30^ 

§  361.     Return  of  Corporate  Funds 

At  the  conclusion  of  the  treasurer's  tenure  of  office,  it  is 
his  duty  to  return  the  corporate  funds  to  hia  successor  or  to 
such  other  party  as  may  be  designated  by  the  board  of 
directors.  If  he  does  not  do  this  voluntarily,  their  return  may 
be  enforced  by  legal  action.^  If  any  deficiencies  are  discovered 
in  the  funds,  the  treasurer  or  his  bondsmen  must  make  them 
good,  and,  if  such  deficiencies  occurred  through  the  treasurer's 
wrongdoings,  he  is  liable  to  a  criminal  action. 


3  Hunter    v.    Robbins,    ii?   Fed.    Rep.    920    (1902);    Consolidated,    etc.,    Works    v. 
Brew.,   iia  Wis.  610  (1902). 


CHAPTER   XLIX 

DIVIDENDS 

§  362.     Declaration  of  Dividends 

The  right  of  the  directors  to  declare  dividends  is  an  inci- 
dent of  their  general  power  to  manage  the  affairs  of  the  cor- 
poration, and  is  recognized  either  directly  or  by  implication 
by  the  statutes  of  every  state.  The  right  is  subject  to  provi- 
sions of  the  charter  or  by-laws  regulating  the  declaration  of 
dividends,  and  to  any  provisions  of  the  statutes  applicable 
thereto.  The  by-laws  almost  invariably  specifically  authorize 
the  declaration  of  dividends  by  the  board  of  directors.  An 
example  of  comprehensive  by-law  provisions  follows: 

The  Board  of  Directors  may  declare  dividends  from 
the  surplus  or  from  the  net  profits  of  the  Company. 

The  dates  for  the  declaration  of  dividends  upon  the 
preferred  stock  and  upon  the  common  stock  of  the 
Company  shall  be  the  days  by  these  By-laws  fixed  for 
the  regular  monthly  meetings  of  the  Board  of  Directors 
in  the  months  of  April,  July,  October,  and  January  in 
each  year,  on  which  days  the  Board  of  Directors  in  its 
discretion  shall  declare  what,  if  any,  dividends  shall 
be  declared  upon  the  preferred  stock  and  the  common 
stock,  or  either  of  such  stocks. 

The  dividends  upon  tl\e  preferred  stock,  if  declared, 
severally  and  respectively,  shall  be  payable  quarterly 
upon  the  thirtieth  day  of  May,  of  August,  of  November, 
and  the  last  day  of  February  in  each  year. 

The  dividends  upon  the  common  stock,  if  declared, 
severally  and  respectively,  shall  be  payable  quarterly  on 
the  thirtieth  day  of  June,  of  September,  of  December, 
and  of  March  in  each  year.^ 


1  By-Laws  of  the  U.   S.   Steel  Corporation,  Art.   VI,   §  5,  "Dividends.* 


DIVIDENDS  397 

In  the  smaller  corporations  the  by-laws  regulating  divi- 
dends are  much  more  general  in  their  provisions,  usually 
merely  restating  the  common  or  statutory  law  on  the  subject, 
as  in  the  following  extract: 

Dividends  shall  be  declared  only  from  the  surplus 
profits  at  such  times  as  the  Board  shall  direct,  and  no 
dividend  shall  be  declared  that  will  impair  the  capital 
of  the  Company. 

Under  this  by-law  the  directors  have  wide  discretion  and, 
provided  no  statutory  provisions  conflict,  may  reserve  any 
profits  they  please  for  surplus  or  working  capital,  or  may  de- 
clare any  legally  available  profits  as  dividends,  and,  so  long  as 
the  exercise  of  their  discretion  is  honest,  can  be  neither  re- 
strained nor  compelled. 

Statutory  provisions  prohibiting  dividends  that  will  impair 
the  capital  stock  or  that  will  render  the  corporation  insolvent 
are  found  in  practically  every  state  of  the  Union.  It  is  but 
seldom  that  the  statutes  go  further  in  respect  to  dividends. 

The  by-laws  frequently  regulate  the  declaration  of  divi- 
dends. In  some  cases  they  provide  that  a  specified  surplus 
fund  shall  be  reserved  before  any  dividends  may  be  declared. 
In  other  cases  they  specify  that,  after  the  reservation  of  a 
designated  surplus,  any  remaining  profits  shall  be  declared  as 
dividends.  Occasionally  the  matter  is  reversed,  the  by-laws 
requiring  that  dividends  to  a  specified  amount  shall  be  de- 
clared before  any  profits  may  be  reserved  as  surplus.  Such  a 
by-law  provision  is,  as  a  rule,  obviously  undesirable  as  it  com- 
pels the  declaration  of  dividends  regardless  of  the  business 
conditions  which  should  control. 

Usually  before  the  date  fixed  for  declaration  of  dividends, 
or,  if  no  such  date  is  fixed,  at  the  time  a  dividend  is  contem- 
plated, the  treasurer  is  called  upon  for  a  statement  showing 
the  corporate  profits  available  for  the  purpose.  If,  however, 
the  corporation  has  ample  surplus  profits,  or  if  the  business  is 


398 


THE    CORPORATE    FINANCES 


SO  prosperous  as  obviously  to  justify  the  proposed  dividend, 
no  statement  is  necessarily  required,  the  directors  merely  de- 
claring the  dividend  as  a  matter  of  course. 

When  the  fact  and  the  amount  of  the  dividend  have  been 
decided  upon,  a  formal  resolution  declaring  it  is  adopted  by 
the  directors.  This  resolution  usually  fixes  specifically  the 
amount  of  the  dividend  and  states  to  whom  and  when  it  shall 
be  paid.  The  amount  is  ordinarily  expressed  as  a  percentage 
upon  the  par  value  of  the  stock,  though  sometimes  as  a  fixed 
amount  per  share.  The  recipients  must  necessarily  be  stock- 
holders of  the  company,  but  are  usually  stockholders  of  a 
specified  future  date,  and  the  time  of  payment  is  usually  fixed 
at  a  still  later  future  date. 

Thus,  a  semiannual  dividend  declared  by  the  Pennsylvania 
Railroad  Company  November  i,  provided  for  a  payment  of 
3J^  per  cent  upon  the  capital  stock  of  the  company,  payable 
on  and  after  November  30,  to  stockholders  as  registered  upon 
the  books  of  the  company  at  the  close  of  business  November 
4.  In  the  notice  of  this  dividend,  the  statement  of  the 
amount  on  each  $50  share,  i.e.,  $1.75  per  share,  is  also  in- 
cluded. 

The  directors  have  full  power  to  declare  a  dividend  effec- 
tive at  any  future  date  they  please.  They  cannot,  however, 
antedate  it.  Thus,  the  directors  could  not  on  January  2,  191 7, 
legally  declare  a  dividend  payable  to  stockholders  of  record  on 
the  15th  of  the  preceding  October.^  The  power  to  do  so 
would,  it  is  obvious,  open  a  wide  door  for  injustice  and  fraud. 

If  the  treasurer  is  a  member  of  the  board  or  is  present  at 
the  board  meeting,  the  passage  of  the  resolution  declaring  the 
dividend  is  undoubtedly  sufificient  notice  to  him  of  the  fact  and 
he  is  then  fully  authorized  to  carry  the  resolution  into  effect. 

If  the  treasurer  is  not  present  at  the  board  meeting,  a  ver- 
bal statement  made  to  him  by  a  member  of  the  board  or  by 


Jones  V.  Terre  Haute,  etc.,  R.  R.,  57  N.  Y.   196  (iSth). 


DIVIDENDS  ^gg 

the  secretary  of  the  company  is  a  common,  but  in  itself  hardly 
sufficient,  notice  of  the  board's  action.  A  personal  inspection 
of  the  resolution  entered  in  the  secretary's  minutes  is  better, 
and  though  informal  is  sufficient.  Written  notice  from  the 
secretary  of  the  passage  of  the  resolution,  with  a  copy  of  the 
resolution  itself  incorporated,  is  more  formal  and  may,  if  he 
chooses,  be  demanded  by  the  treasurer.  As  soon  as  the  treas- 
urer has  authoritative  notice  of  the  resolution,  no  matter  how 
his  knowledge  is  derived,  he  may  proceed  at  once  to  the  pay- 
ment of  the  dividend  in  accordance  with  its  terms. 

The  resolution  declaring  a  dividend  usually  provides  for 
the  closing  of  the  stock  books  to  transfers  of  stock  for  a  cer- 
tain period  before  the  dividend  day,  i.e.,  the  day  when  the 
dividend  is  to  be  paid.  This  provision  for  closing  the  transfer 
books  is  usually  and  properly  part  of  the  charter  or  by-law 
requirements  of  the  corporation.  It  is  questionable  whether 
the  directors  would  have  power  to  close  the  transfer  books 
unless  so  authorized. 

§  363.     Profits  and  Dividends 

Profits  are  the  only  proper  source  of  dividends.  The  dec- 
laration of  dividends  when  there  are  no  profits  is  contrary  to 
law,  usually  involves  a  personal  liability  by  the  parties  respon- 
sible, and  in  many  states  involves  a  criminal  liability  as  well. 
If  an  illegal  dividend  is  contemplated,  any  stockholder  may 
enjoin  its  declaration  or  payment,  and,  should  the  company 
become  insolvent,  the  stockholders  who  receive  such  dividends 
may  be  compelled  to  make  restitution.^ 

The  general  rule  in  this  country  is  that  before  dividends 
can  be  properly  declared,  any  impairment  of  capital  through 
business  losses  in  previous  years  or  through  depreciation,  must 
first  be  made  good.     In  other  words,  dividends  must  be  de- 


*a  Cook  on   Corp.,   §§547,   548;   Stevens  v.   U.   S.   Steel   Corp.,   68  N.   J.   Eq.   373 
(1505);  Fricke  v.   Angemeier,   101   N.   E.    (Ind.)   339  (1913). 


400  THE    CORPORATE   FINANCES 

dared  out  of  "surplus."^  As  it  is  stated  in  a  Missouri  case, 
"dividends  can  properly  be  declared  only  from  the  profits 
over  and  above  the  capital  stock  and  the  debts  of  the  com- 
pany."^ Before  declaring  a  dividend  the  directors  should  ex- 
amine carefully  the  financial  condition  of  the  company  and 
the  statutory  provisions  regulating  the  declaration  of  dividends 
in  the  state  of  incorporation. 

An  exception  to  the  general  rule  that  dividends  impairing 
the  capital  stock  may  not  be  paid,  is  found  in  the  case  of  com- 
panies working  mines  or  operating  under  leases,  patent  rights, 
etc.  Here  the  corporation  is  organized  for  the  express  pur- 
pose of  working  out  the  property  which  is  represented  by  its 
capital  stock  and  the  impairment  and  final  exhaustion  of  this 
property  is  the  object  of  the  corporate  operations. 

In  any  such  case  if  a  company  is  formed  "to  acquire  and 
work  a  property  of  a  wasting  nature,  for  example,  a  mine,  a 
quarry  or  a  patent,  the  capital  expended  in  acquiring  the  prop- 
erty may  be  regarded  as  sunk  and  gone,  and  if  the  company 
retains  assets  sufficient  to  pay  its  debts,  it  appears  to  me  that 
there  is  nothing  whatever  in  the  Act  to  prevent  any  excess  of 
money  obtained  by  working  the  property  over  the  cost  of 
working  it  from  being  divided  amongst  the  shareholders,  and 
this,  in  my  opinion,  is  true  although  some  portion  of  the 
property  itself  is  sold  and  in  some  sense  the  capital  is  thereby 
diminished."^  The  decision  in  the  English  case  from  which  the 
foregoing  quotation  is  taken,  has  been  generally  followed  in 
this  country  and  is  regarded  as  establishing  the  rule.  It  must, 
however,  be  noted  that  in  this  case  the  assets  of  the  company 
were  ample  and  there  was  no  question  of  insolvency  or  charge 
of  indiscretion  in  the  declaration  of  dividends  which  formed 
the  basis  of  litigation. 


*  Williams   v.    Western    Union    Telegraph    Co.,    93    N,    Y.    162    (1883.);    Roberts   v. 
Roberts-Wicks  Co.,   ia4.  N.   Y.   257  (1906);  Thompson  on  Corp.,   §  SGi'Z- 


6  Shields  v.    Hobart,   172  Mo.  491,   517   (1902). 

«  Lee  V.   Neuchatel  Asphalte  Co.,  L.   R.  41  Ch.  D.  i   (i 


DIVIDENDS  401 

A  difficulty  sometimes  arises  when  determining  the  cor- 
porate profits  for  dividend  purposes  as  to  what  expenditures 
may  properly  be  charged  to  capital  stock  account  and  what 
should  be  charged  to  current  expenses.  Thus,  if  a  manufac- 
turing concern  purchases  machinery  and  this  is  charged  to 
capital  stock  account,  the  books  will  show  a  larger  net  profit 
for  the  year  than  if  the  item  is  charged  to  expense  account. 
The  matter  is  one  of  bookkeeping  and  the  actual  assets  of  the 
company  are  not  affected  in  either  case,  but  its  profits  legally 
available  for  dividends  are  directly  increased  or  diminished 
according  to  the  account  to  which  the  item  is  debited. 

This  question  usually  arises  when  the  directors  are  anx- 
ious to  divert  every  possible  penny  into  dividends.  The  prob- 
lem is  a  difficult  one  and  its  solution  will  vary  with  the  con- 
ditions. "It  may  be  safely  said  that  what  losses  can  be 
properly  charged  to  capital  and  what  to  income  is  a  matter  for 
business  men  to  determine  and  it  is  often  a  matter  on  which 
the  opinions  of  honest  and  competent  men  will  differ."  ^  Speak- 
ing generally,  only  those  expenditures  for  which  stock  or 
bonds  might  be  issued  with  propriety  can  be  properly  charged 
to  capital  account. 

§  364.     Equality  of  Dividends 

Dividends,  as  stated,  are  usually  declared  as  a  percentage 
upon  the  outstanding  capital  stock,  or  as  a  certain  amount  on 
each  class  of  stock,  and  each  stockholder  in  any  class  of 
stock  participates  according  to  the  stock  he  holds.  This  rule 
is  absolute.  "When  they  (the  directors)  undertake  to  de- 
clare a  dividend,  they  are  bound  to  make  it  equal  and  just 
among  all  who  are  interested.  They  would  have  no  right  to 
divide  their  profits  among  a  few  particular  friends,  neither 
would  they  have  authority  to  say  that  one  class  of  stock- 
holders should  receive  a  larger  amount  of  the  profits  or  a 

'  Gregory  v.   Patchett,  3^  Beav.   595   (1864). 


402  THE    CORPORATE    FINANCES 

greater  dividend  than  others.  They  are  but  the  agents  of  the 
stockholders.  The  profits  belong  to  the  stockholders  and  they 
must  apportion  them  fairly  and  justly  with  due  regard  to 
the  interests  of  each  and  all  of  them.  They  cannot  make  an 
unjust  discrimination,  giving  one  an  advantage  over  another. 
If  they  do  this,  they  exceed  their  powers  and  the  courts  have 
a  right  to  interpose  their  authority  to  prevent  it."^ 

The  general  rule  of  equality  applies,  however,  only  to 
stockholders  of  the  same  class.  In  the  organization  of  a  cor- 
poration, or  later  if  the  proper  formalities  are  observed,  dif- 
ferent classes  of  stock  may  be  created  and  these  may  be 
given  different  dividend  rights.  (See  Chapter  IX,  "Preferred 
Stock.")  Thus,  preferred  stocks  are  frequently  created 
with  preferential  dividends  which  they  receive  before  other 
classes  of  stock  receive  anything  at  all.  The  difference  is, 
however,  one  that  was  intended  and  one  that  is  clearly  set  out 
in  the  provisions  by  which  the  preferred  stock  is  created ;  and 
as  it  is  understood  and  by  implication  agreed  to  by  every  stock- 
holder of  the  corporation,  no  injustice  results. 

As  between  the  members  of  any  one  class,  however,  divi- 
dends must  be  paid  with  absolute  impartiality.  The  number 
of  shares  of  stock  each  holds  must  determine  the  amount  re- 
ceived by  him  when  dividends  are  paid.  The  time  of  pay- 
ment and  the  method  of  payment  must  be  the  same  for  all. 
Some,  unless  by  consent  or  agreement,  cannot  be  paid  in  cash 
while  others  are  paid  on  stock  or  scrip.    All  must  fare  alike.^ 

§  365.     Compelling  the  Declaration  of  Dividends 

The  declaration  of  dividends  rests  entirely  in  the  dis- 
cretion of  the  board  unless  otherwise  provided  by  statutes, 
charter,  or  by-laws.^**    It  is  but  seldom  that  the  stockholders 

sLuling  V.   Atl.   Mut.   Ins.   Co.,  45  Barb.    (N.   Y.)   510  (1865);   Miller,  J. 

•Jones  V.  Terre  Haute,  etc.,  R.  R.,  57  N.  Y.  ig6  (1874);  State  v.  Bait.,  etc.,  R. 
R.,  6  Gill  (Md.)  z^2  (184S) ;  Godley  v.  Crandall  &  Godley  Co.,  153  App.  Div.  (N. 
Y.)   697   (191a). 

*»  Hunter  v.  Roberts,  Throp  &  Co.,  83  Mich.  63  (1890);  Burden  v.  Burden, 
159  N.  Y.  2871  (1899);  New  York,  etc.,   R.   R.  v.   Nickals,  119  U.   S.  2^  (1886) 


DIVIDENDS  403 

can  compel  the  directors  against  their  judgment  to  declare  a 
dividend,  even  though  liberal  reservations  of  profits  are  being 
made  for  working  capital  or  as  a  surplus  fund  for  future 
contingencies.  'The  courts  have,  no  doubt,  in  many  cases 
overruled  the  directors  who  proposed  to  pay  dividends,  but  I 
am  not  aware  of  any  case  in  which  the  court  has  compelled 
them  to  pay  when  they  have  expressed  their  opinion  that  the 
state  of  the  accounts  did  not  admit  of  any  such  payment."^^ 

There  is,  however,  a  point  at  which  the  courts  will  intervene 
to  prevent  undue  or  improper  retention  of  profits.  ''The  direc- 
tors must  act  in  good  faith.  If  they  fail  to  do  so  and  it  clearly 
appears  that  they  have  accumulated  earnings  not  required  in 
the  prosecution  of  the  business  which  they  withhold  from  the 
stockholders  for  illegitimate  purposes,  a  court  of  equity  may 
interfere  and  compel  a  distribution  of  such  earnings."  ^^ 
"Courts  of  equity  will  not  interfere  in  the  management  of  the 
directors  unless  it  is  clearly  made  to  appear  that  they  are 
guilty  of  fraud  or  misappropriation  of  the  corporate  funds  or 
refuse  to  declare  a  dividend  when  the  corporation  has  a  sur- 
plus of  net  profits  which  it  can,  without  detriment  to  its 
business,  divide  among  its  stockholders,  and  when  a  refusal 
to  do  so  would  amount  to  such  an  abuse  of  discretion  as  would 
constitute  a  fraud  or  breach  of  that  good  faith  which  they 
are  bound  to  exercise  towards  the  stockholders."  ^* 

Cases  sometimes  arise,  however,  where  a  refusal  to  de- 
clare dividends,  even  where  apparently  reasonable  on  its  face, 
is  inequitable  because  of  the  conditions.  For  instance,  preferred 
stock  not  infrequently  carries  non-cumulative  dividends,  and, 
if  these  dividends  are  not  declared  in  any  year,  they  are  lost 
to  the  preferred  stock  entirely.  It  is  obvious,  then,  that  if 
profits  exist  from  which  the  dividends  might  be  paid  but  the 


"  Bond  V.    Barrow,  etc.,   Co.,  86  L.  T.   Rep.    10  (1902). 

"Matter  of  Rogers.  i6t  N.  Y.  108  (1899);  Wilson  v.  Amer.  Ice  Co.,  206  Fed. 
736  (1913) ;  Gehrt  v.  Collins  Plow  Co.,  ijis  III  App.  98  (1910) ;  Spear  v.  R.  R.  Lime 
Co.,  93  Atl.    (Me.)   7S4,  (191 5). 

"Hunter  v.   Roberts,  Throp  &  Co.,  83  Mich.  6j  (1890). 


404 


THE    CORPORATE    FINANCES 


directors  instead  of  declaring  these  dividends,  carry  them  over 
in  surplus  until  the  following  year,  the  preferred  stock  has 
been  juggled  out  of  a  dividend  that  properly  belongs  to  it  and 
there  is  a  distinct  advantage  to  the  holders  of  the  common 
stock. 

Thus,  if  a  company  has  a  capitalization  of  $200,000,  of 
which  $50,000  is  preferred  non-participating  stock  carrying  a 
7  per  cent,  non-cumulative  dividend,  and  the  remainder  is 
common  stock,  and  the  directors  pay  no  dividends  for  five 
years  although  profits  sufficient  to  pay  the  preferred  dividends 
were  made,  these  dividends,  amounting  to  $17,500,  are  lost 
absolutely  to  the  preferred  stock.  Then  in  the  sixth  year,  the 
directors,  should  they  so  desire,  might  declare  a  7  per  cent  divi- 
dend on  the  preferred  stock  amounting  to  $3,500,  which  is  all 
the  preferred  stock  is  entitled  to  for  that  year,  and  thereafter 
declare  the  entire  remaining  profits  as  a  dividend  on  the  com- 
mon stock.  This  latter  then  receives  $14,000  that  really  be- 
longs to  the  preferred  stock. 

In  cases  of  this  kind  the  courts  are  much  less  reluctant  to 
intervene  and  will  usually  compel  payment  of  the  dividends 
on  the  preferred  stock  for  any  year  if  satisfactory  proof  is 
adduced  that  profits  exist  sufficient  for  the  purpose,  which  can 
be  used  without  injury  to  the  corporation.  Even  here,  how- 
ever, the  court  scrutinizes  the  condition  of  the  corporation 
closely  and  refuses  the  dividend  unless  it  is  clearly  and  unmis- 
takably withheld  wrongfully  and  to  the  injury  of  the  pre- 
ferred stock.  ^* 

§  366.     Status  of  Declared  Dividends 

When  a  dividend  is  once  declared  it  becomes  a  debt  of  the 
corporation  and  stands  on  a  parity  with  its  other  debts.  Should 
the  corporation  become  insolvent  before  such  dividend  is  paid. 


"Belfast,   etc.    R.    R.    v.    Belfast,   ^7   Me.    445   (1885);    Wilson   v.    Amer.    Ice  Co. 
ao6  Fed.   Rep.   736  (1915). 


DIVIDENDS 


405 


the  stockholders  take  their  place  among  the  other  creditors 
of  the  corporation  and  may  enforce  their  claims  as  would  any- 
other  corporate  creditor.  ^^ 

Further  than  this,  if  the  money  to  pay  a  declared  dividend 
is  set  aside  in  a  separate  fund  for  the  purpose,  even  though 
merely  placed  on  deposit,  it  has  been  held  that  this  particular 
fund  becomes  the  absolute  property  of  the  stockholders — a 
trust  fund  held  by  the  corporation  for  their  benefit — and,  pro- 
vided only  that  the  dividend  is  legal  and  the  fund  is  set  aside 
in  good  faith,  such  fund  cannot  be  reclaimed  by  the  corpora- 
tion nor  is  it  liable  to  taxation  or  for  the  corporate  debts/^ 
However,  "simply  declaring  a  dividend  does  not  create  a  trust 
fund.  To  create  such  a  fund  some  specific  sum  of  money 
must  be  set  apart  for  paying  the  dividend.  Until  this  is  done, 
the  relation  of  the  corporation  to  its  stockholders  in  respect 
to  dividends  is  that  of  debtor  and  creditor."" 

A  dividend  does  not,  however,  become  an  irrevocable  fact 
until  notice  of  ihe  resolution  declaring  it  has  been  given  or 
the  fact  that  it  has  been  adopted  has  become  known.  If  the 
directors  have  voted  the  dividend  but  the  fact  has  not  been 
made  public  in  any  way,  the  transfer  has  not  been  consum- 
mated and  the  action  of  the  board  up  to  this  point  may  be  re- 
scinded and  becomes  a  nullity.  ^^ 

Also,  under  some  circumstances  a  formally  declared  divi- 
dend may  be  revoked.  Thus,  should  the  board  declare  a  divi- 
dend in  defiance  of  or  in  ignorance  of  facts  which  make  it 
illegal,  the  action  of  the  board  may  be  rescinded  at  any  time 
before  payment  of  the  dividend  has  actually  been  made,  or  its 
payment  may  be  enjoined  at  the  suit  of  objecting  stock- 
holders.^^ 


«  Hunt  V.   O'Shea,  69  N.   H.   600   (1899). 

18  Pollard    V.    First    Nat.    Bk.,    47   Kans.    406    (1891) ;    Searles   v.    Gebbie,    115   App. 
Div.    (N.   Y.)    7,78   (1906). 

"Hunt  V.    O'Shea,  69  N.    H.   600   (1899)- 

18  Ford  V.    Easthampton   Rubber  Thread   Co.,   158  Mass.  841  (1893). 

"  Marquand  v.   Federal,   etc.,   Co.,  95  Fed.   Rep.   725   (1899). 


4o6 


THE    CORPORATE    FINANCES 


As  a  declared  dividend  is  a  debt  due  from  the  corpora- 
tion to  the  stockholder,  any  real  existing  indebtedness  of  the 
stockholder  to  the  corporation  may  be  set  off  against  the  divi- 
dend and  be  deducted  from  it,  provided  the  debt  is  actually 
due  at  the  time  the  dividend  is  payable.  Accordingly  the  cor- 
poration has  full  power  to  apply  dividends  in  payment  of  sub- 
scriptions due  on  its  stock  from  the  stockholders.  ^'^ 

It  may  be  noted  that  a  contract  between  the  corporation 
and  a  subscriber  to  its  stock  that  his  subscription  shall  be  paid 
for  in  dividends,  is  absolutely  invalid  both  as  against  the  cor- 
poration and  against  corporate  creditors.  Under  such  an 
agreement,  any  credits  of  declared  dividends  actually  made 
would  be  held  a  valid  payment,  but,  in  case  of  the  insolvency 
of  the  corporation  before  the  stock  was  full  paid,  the  stock- 
holder could  be  called  upon  to  pay  in  cash  all  amounts  still  due 
on  his  subscription,  regardless  of  the  agreement  that  it  was 
to  be  paid  in  dividends.^^ 


»  Kenton,  etc.,  Co.   v.   McAIpin,  5  Fed.   Rep.   737  (1880). 
*^  Hawkins  v.     Citizens',  etc.,  Co.,  38  Ore.  544  (1901). 


CHAPTER   L 

DIVIDENDS  (Continued) 

§  367.     Form  of  Dividends 

Dividends  are  usually  paid  in  cash  and,  unless  otherwise 
stated,  cash  payment  is  always  understood.  Dividends  may, 
however,  be  declared  from  existing  profits  regardless  of  the 
form  of  these  profits.  "The  surplus  may  be  in  cash  and  then 
it  may  be  divided  in  cash;  it  may  be  in  property,  and  if  the 
property  is  so  situated  that  a  division  thereof  among  the  stock- 
holders is  practicable,  a  dividend  in  property  may  be  declared, 
and  that  may  be  distributed  among  stockholders."  Also,  if 
the  profits  are  not  in  the  form  of  cash  and  not  in  a  form  to 
be  distributed  directly  as  property  among  the  stockholders, 
the  property  might  be  sold  or  be  used  as  a  basis  for  a  loan 
of  cash  to  be  used  in  payment  of  dividends;  or  scrip,  bonds 
or  stock  might  be  issued  against  it  as  dividends.^ 

Another  method  of  disbursing  profits  occasionally  prac- 
ticed, is  that  of  paying  these  profits  to  the  officers  of  the  cor- 
poration under  the  guise  of  salaries.  The  excess  amount  of 
these  salaries  represents  the  dividends  that  would  otherwise  be 
declared.  It  is  obvious  that  this  practice  is  proper  only  when 
all  the  stockholders  are  also  officers  of  the  corporation  or  con- 
sent to  the  otherwise  excessive  salaries.  "So  long  as  all  the 
parties  in  interest,  incorporators,  stockholders,  directors  and 
officers,  assented  to  the  scheme  for  the  distribution  of  assets  by 
the  payment  of  salaries,  the  plan  was  not  objectionable."^ 
But  if  any  interested  parties  do  not  consent,  the  plan  becomes 
not  only  objectionable  but  illegal. 


'Fitchett  V.  Murphy,  46'App!  Div.   (N.  Y.) 'i8i"'(i899). 

407 


4o8  THE    CORPORATE    FINANCES 

§  368.     Cash  Dividends 

The  simplest  form  of  dividends  are  those  paid  in  cash. 
Such  dividends  are  usually  declared  and  paid  from  cash  profits 
on  hand.  If,  however,  the  profits  of  the  company  exist  in 
some  other  form  of  property,  the  directors  may,  as  already 
stated,  sell  such  property  and  use  the  proceeds  for  the  cash 
payment  of  dividends,  or  may  borrow  the  cash  on  the  security 
of  this  property  or  on  the  general  credit  of  the  corporation  and 
pay  the  dividends  from  the  money  thus  obtained ;  or  they  may, 
under  proper  conditions,  issue  stocks,  bonds,  or  scrip  against 
the  property  and  secure  cash  for  the  payment  of  dividends 
from  the  sale  of  these  securities. 

§  369.     Dividends  Not  in  Cash 

If  corporate  profits  available  for  dividends  are  in  the 
form  of  property  and  the  directors  do  not  care  to  sell  or  en- 
cumber this  property,  or  if  they  wish  to  reserve  the  cash 
profits  for  the  use  of  the  corporation,  dividends  may  be  de- 
clared in  several  different  forms. 

1.  The  capital  stock  may  be  increased  and  this  increase 

be  distributed  as  a  stock  dividend,  or  any  unissued 
or  treasury  stock  on  hand  may  be  used  for  the 
purpose. 

2.  Bonds  may  be  issued  to  the  amount  of  the  dividend 

and  these  bonds  be  distributed. 

3.  Scrip  may  be  issued  against  the  profits  and  the  scrip 

be  distributed  as  dividends. 

4.  If  the  property  is  in  such  shape  as  to  permit,  it  may 

itself  be  distributed  as  a  property  dividend. 

,  Dividends  in  all  these  different  forms,  if  issued  under 
proper  conditions,  are  held  to  be  legal  and  are  sustained  by  the 
courts.^ 


•Williams  V.   W.   U.  Tel.   Co.,  93  N.  Y.   162   (1883);  Soehnlein  v.  Soehnlein,   146 
Wis.   3130  (191 1). 


DIVIDENDS  409 

In  the  case  of  dividends  paid  in  other  forms  than  cash  the 
same  general  rules  apply  as  to  cash  dividends.  There  must  be 
an  equality  among  the  stockholders,  and  the  proportionate 
amount,  the  time  of  payment,  and  the  form  in  which  the  divi- 
dend is  paid  must  be  the  same  for  all. 

It  may  be  noted  that  preferred  stockholders  share  with 
holders  of  common  stock  in  dividends  paid  in  other  forms  than 
cash  exactly  as  they  would  if  the  dividends  were  paid  in  cash.* 

§  370.     (i)  Stock  Dividends 

In  some  few  states  stock  dividends  are  prohibited  by  law. 
In  Massachusetts  telegraph,  telephone,  railroad  and  some 
other  classes  of  public  service  corporations  are  forbidden  to 
issue  stock  or  scrip  dividends.  Even  there,  however,  the  end 
is  practically  accomplished  by  the  declaration  of  a  dividend 
to  the  stockholders.  These  dividends  are  then  a  debt  due 
from  the  corporation  to  its  stockholders.  A  simultaneous 
offering  of  stock  to  an  equal  amount  is  made  and  this  stock 
is  purchased  by  the  stockholders,  their  indebtedness  therefor 
being  offset  by  the  dividends  due  them.^ 

In  most  of  the  states,  however,  no  such  restriction  exists 
and  stock  dividends  are  not  uncommon,  and  under  proper  con- 
ditions are  not  legally  objectionable.  If  the  directors  wish  to 
retain  the  corporate  profits  to  increase  the  capital  of  the  cor- 
poration, "it  becomes  immaterial  whether  such  increase  is  made 
by  awarding  the  stock  to  stockholders  as  dividends  in  lieu  of 
money,  retaining  the  money  for  the  purposes  of  the  company, 
or  by  paying  the  stockholders  the  dividends  in  cash  from 
the  earnings  of  the  company  and  selling  the  stock  in  the 
market  to  raise  money  for  the  use  of  the  corporation."®  Or 
as  stated  in  a  later  case,  "So  long  as  every  dollar  of  stock 


♦Howell   V.    Chicago,    etc.,    Ry,    Co.,    5^    Barb.    378    (1868);    Gordon   v.    Richmond, 
etc.,    R.    R..  78  Va.   501    (1884). 

*  Jones  V.    Brown,   171   Mass.   318   (1898);   Hyde  v.   Holmes,    198  Mass.   287   (1908). 
«HoweU  V,  Chicago,  etc.,  Ry.  Co.,  51  Barb.  (N.  Y.)  57S  (1868). 


4IO 


THE    CORPORATE    FINANCES 


issued  by  a  corporation  is  represented  by  a  dollar  of  property, 
no  harm  can  result  to  individuals  or  the  public  from  distribut- 
ing stock  to  stockholders.  .  .  .  All  that  can  be  required 
in  any  case  is  that  there  shall  be  an  actual  capital  in  property 
representing  the  amount  of  share  capital  issued."^ 

A  stock  dividend  issued  against  actual  corporate  property 
of  at  least  equal  value  is  held  to  be  full  paid^  but,  if  not  so 
issued  in  good  faith,  is  not.^ 

Where  a  corporation  purchases  the  stock  of  another  cor- 
poration out  of  its  surplus  earnings  and  later  distributes  such 
shares  of  stock  among  its  stockholders  as  a  dividend,  such  a 
dividend  is  not  a  "stock  dividend."^^ 

It  v^ill  be  observed  that  a  stock  dividend  of  the  kind  here 
considered  is  entirely  different  from  that  derived  from  "stock 
watering,"  in  which  the  new  stock  does  not  represent  profits  at 
all  but  is  merely  a  dilution  of  the  existing  capital  and  is  illegal 
and  objectionable. 

§  371'     (2)  Bond  Dividends 

The  corporate  bonds  may  take  the  place  of  cash  in  pay- 
ment of  dividends  at  the  discretion  of  the  directors,  provided 
that  they  are  issued  only  against  actual  profits.  The  argument 
for  their  issue  is  the  same  as  for  the  issue  of  stock  as  divi- 
dends. If  the  company  has  profits  available  for  dividends,  it 
may  take  these  profits  for  the  corporate  purposes  and  replace 
them  with  the  bonds  and  distribute  these  bonds  as  dividends. 
The  bond  dividend  is  held  legal  when  issued  against  actually 
existing  corporate  profits. ^^ 

From  the  practical  standpoint  it  must,  however,  be  ob- 


'  Williams  v,  W.  U.  Tel.  Co.,  93  N.  Y.  162  (1883);  Earl,  J.;  Rose  v.  Barclay, 
191    Pa.    St.    £94    (1899). 

s  Kenton,  etc.,  Co.  v.  McAlpin,  s  Fed.  Rep,  737  (1880);  Berwind- White  Coal  Co. 
V.    Ewart,    11    Misc.    (N.    Y.)    490   (1895). 

»Shaw  V.   Gilbert,  in   Wis.   165   (1901). 

^^  Gray  v.  Hemenway,  212  Mass.  239  (1912) ;  Union,  etc..  Trust  Co.  v.  Taintor, 
83   Conn.   452   (19112). 

"Wood  V.  Lary,  124  N.  Y.  83  (1891) ;  s.  c,  47  Hun  550;  N.  Y.,  etc.,  R.  R.  v. 
Nickals,  119  U.  S.  296  (1886). 


DIVIDENDS  411 

served  that  bonds  carry  interest  which  becomes  a  fixed  charge 
against  the  company  and  must  be  paid  thereafter  whether 
profits  are  made  or  not.  Also  the  bond  itself  is  an  absolute 
obligation  of  the  company  which  must  be  paid  at  maturity. 
Both  these  features  may  be  objectionable,  and  do  not  exist  in 
the  case  of  stock. 

§  372.     (3)  Scrip  Dividends 

The  favorite  method  of  paying  dividends  when  neither 
stock  nor  bonds  are  available  or  expedient,  is  by  means  of 
scrip.  This  is  practically  a  deferred  dividend,  scrip  being  a 
certificate  stating  that  the  owner  or  holder  is  entitled  to  certain 
rights  or  privileges  specified  in  the  certificate — usually  a  cer- 
tain amount  of  cash  payable  at  some  fixed  future  date.  In 
the  issue  of  scrip  dividends  the  same  rule  obtains  as  in  the  case 
of  any  other  dividends.  Profits  must  exist  as  a  basis  for  their 
issue. 

Usually  scrip  represents  existing  profits  which  are  not  in 
the  form  of  money  but  which  may  be  realized  upon  at  some 
future  date  and  the  money  then  be  used  to  pay  off  this  scrip. 
Or  there  may  be  no  intention  that  the  corporate  property  shall 
be  realized  upon,  the  expectation  being  that  at  the  time  the 
scrip  becomes  due,  cash  will  be  on  hand  for  its  payment  with- 
out regard  to  whether  the  property  in  question  is  sold  or  not. 

Sometimes,  however,  scrip  represents  an  absolute  reser- 
vation of  cash  profits,  as  in  a  case  where  the  cash  is  available 
for  dividends,  but  the  directors  determine  that  it  can  be  used 
advantageously  to  improve  the  corporation's  plant  or  equip- 
ment. It  is  generally  within  the  discretion  of  the  directors 
whether  a  scrip  dividend  be  declared,  or  whether  the  earnings 
be  held  merely  as  surplus  profits.  The  effect  of  the  issuance 
of  a  scrip  dividend  is  to  increase  the  indebtedness  of  the  cor- 
poration by  the  amount  of  the  dividend.^^ 


"  Billingham  v.  Gleason  Mfg.  Co.,  loi  App.  Div.  476  (1905) ;  aflfd.,  185  N.  Y.  571 
(1906). 


412  THE    CORPORATE    FINANCES 

The  payment  date  on  scrip  may  be  made  absolute,  or  it 
may  be  made  contingent,  as  where  it  is  provided  that  scrip  be 
payable  as  soon  as  the  company  accumulates  sufficient  surplus 
funds  for  the  purpose  or  when  specific  property  upon  which 
the  scrip  is  based  shall  be  sold,  or  it  may  be  made  "at  the 
pleasure  of  the  Company/^  In  the  latter  case  it  has  been 
held  that  the  dividend  must  be  paid  within  a  reasonable  time." 

Scrip  is  issued  in  many  Klifferent  forms.  Sometimes  the 
certificates  are  convertible,  being  exchangeable  at  a  certain 
time  for  stock  or  bonds  of  the  company  on  demand  of  the 
holder.  At  times  scrip  certificates  entitle  the  holders  to  divi- 
dends as  would  stock  to  the  same  value.  The  scrip  then  par- 
takes much  of  the  nature  of  stock  save  that  it  has  no  voting 
power. 

Scrip  certificates,  though  issued  as  a  dividend  and  in  lieu 
of  certain  property  in  the  possession  of  the  corporation,  do  not 
fix  the  ownership  of  that  property  in  the  holders  of  the  certifi- 
cates. They  do  give  the  holder  a  claim  against  the  corpora- 
tion— not  the  absolute  claim  which  the  ordinary  declared 
dividend  gives,  but  a  conditional  claim  dependent  upon  the 
terms  of  the  scrip  certificate. 

Provided  only  that  the  principal  and  any  interest  to  be 
paid  on  corporate  scrip  are  either  represented  by  corporate 
profits  actually  on  hand,  or  are  payable  only  from  future 
profits,  or  profits  for  such  payments  actually  exist  at  the  time 
or  will  exist  when  the  demands  fall  due,  the  scrip  dividend  is 
not  legally  objectionable. 

§  373-     (4)  Property  Dividends 

Dividends  may  consist  of  actual  property,  though,  except 
in  the  case  of  corporate  securities,  there  are  obvious  difficulties 
in  the  way  of  distribution  which  make  such  dividends  rare. 
Thus,  a  company  whose  profits  were  in  land,  might  divide  this 

"  Billingham  v.  Gleason  Mfg.  Co.,  loi  App.  Div.  (N.  Y.)  476  (1905). 


DIVIDENDS  413 

land  among  its  stockholders  as  a  dividend,  if  it  could  do  so 
equitably,  and  no  objection  could  be  raised.  The  more  usual 
form  of  property  dividends  is,  however,  that  of  securities  of 
other  corporations  received,  when  the  corporation  sells  prop- 
erty or  rights  of  some  kind  to  another  corporation,  taking  the 
stocks  and  bonds  of  that  other  corporation  in  payment.  Or 
securities  may  have  been  bought  outright  at  some  previous 
time  from  profits.  The  stock  and  bonds  so  received  are  then 
divided  among  the  stockholders  of  the  receiving  company  as 
dividends.  There  are  no  objections  to  such  dividends  provided 
they  represent  actual  profits. 

Usually,  however,  dividends  of  this  kind  are  declared  only 
when  a  corporation  is  liquidated,  all  its  property  perhaps  hav- 
ing been  exchanged  for  stock  or  bonds,  or  both,  of  the  pur- 
chasing corporation.  In  this  case  the  distribution  is  not 
strictly  speaking,  a  payment  of  dividends  but  is  a  distribution 
of  assets,  and  the  ordinary  rule  that  dividends  may  be  declared 
only  from  profits  does  not  apply. 

§  374.     Notice  of  Dividends 

The  directors  of  a  corporation  have  full  power  to  fix  the 
time  and  place  of  payment  of  dividends,  if  reasonable  and  in 
good  faith,  but  they  must  give  stockholders  due  notice.^* 

When  dividend  checks  are  not  mailed,  notice  must  be  given 
the  stockholders  of  the  time  and  place  at  which  dividends  will 
be  paid.  These  notices  are  sent  out  by  the  treasurer  or  the 
secretary,  according  to  the  regulations  of  the  particular  cor- 
poration. The  officer  sending  the  notices  must  be  governed 
absolutely  by  the  stock  book,  unless  he  has  personal  knowledge 
or  has  received  formal  notice  of  the  fact  that  some  particular 
stockholder  of  record  is  not  the  stockholder  in  fact.  The  party 
to  whom  the  dividend  is  to  be  paid  is  always  the  proper  party 
to  notify.    If  there  is  doubt  in  any  particular  case  as  to  whom 

>*JCing  V.   Paterson,  etc.,  R.   R.  Co.,  29  N.  J.  L.  83  (i860). 


414 


THE    CORPORATE    FINANCES 


a  dividend  is  to  be  paid,  responsibility  may  be  avoided  by 
sending  notices  to  all  the  parties  interested,  leaving  the  owner- 
ship of  the  dividend  to  be  settled  later. 

In  some  of  the  larger  corporations,  notice  of  a  dividend 
and  the  time  and  place  of  payment  and  the  period  for  which 
the  stock  books  are  closed,  is  usually  mailed  to  every  stock- 
holder and  is  published  in  the  newspapers  as  well — this  latter 
not  entirely  as  a  legal  requirement  but  as  a  general  notification 
to  the  stockholders  and  to  the  general  public  as  well  that  the 
corporation  is  paying  dividends.  The  publication  of  the  divi- 
dend notice  is  presumptive  proof  of  notice  to  the  stockholders 
but  is  not  alone  conclusive.  If  the  stockholders  see  the  notice, 
it  is  sufficient,  but,  if  any  particular  stockholder  does  not  hap- 
pen to  see  the  newspaper  announcement,  he  cannot  be  held  to 
have  received  notice  and  the  corporation  is  liable  for  any 
resulting  loss.^'"^ 

At  the  present  time  corporations  when  paying  dividends 
usually  mail  checks  to  the  stockholders,  and  this,  if  properly 
done,  avoids  any  possibility  of  failure  of  notice.  The  dividend 
checks  are  nothing  more  than  orders  upon  the  bank  for  pay- 
ment of  the  amount  due  the  stockholder,  but  the  recipient  of 
such  a  check  has  in  the  check  itself  sufficient  notice  of  the 
time  and  place  for  the  payment  of  his  dividend.  Where 
checks  are  mailed,  a  newspaper  notice  of  dividends  is  usually 
deemed  entirely  sufficient. 

Dividend  notices  are  frequently  signed  and  issued  by  the 
secretary  but  more  commonly  are  issued  over  the  signature  of 
the  treasurer.    The  legal  effect  is  the  same  in  either  case. 

§  375.     To  Whom  Paid 

A  stockholder  of  record  is  one  whose  name  appears  upon 
the  stock  books  of  the  corporation  as  an  owner  of  its  stock. 
Dividends  are  ordinarily  payable  to  those  who  at  the  time  the 


King  V.  Paterson,  etc.,  R.  R.  Go.,  29  N.  J.  L.  82  (i860). 


DIVIDENDS 


415 


dividend  becomes  effective  are  stockholders  of  record.  The 
stock  book,  therefore,  at  this  time  shows  to  whom  the  dividend 
must  be  paid. 

The  rule  is  not,  however,  invariable.  It  may  be  that  stock 
is  pledged  and  the  pledgee  has  not  had  the  stock  transferred  to 
his  own  name,  though  dividends  are  payable  to  him.  Or  occa- 
sionally it  happens  that  stock  has  been  sold  before  the  declara- 
tion of  the  dividend,  but  the  transfer  through  neglect  or  other 
cause  has  not  been  recorded  on  the  books.  The  equitable 
ownership  of  the  stock  and  the  right  to  the  dividend  then  vests 
in  the  party  to  whom  the  stock  has  been  assigned,  but  the 
ownership  of  record  still  remains  in  the  former  owner. 

The  treasurer,  in  the  absence  of  notice,  has  no  concern 
as  to  these  equitable  owners.  The  stock  books  of  the  corpora- 
tion are  conclusive  for  his  purposes  until  their  evidence  is 
impeached  by  the  presentation  of  duly  assigned  certificates,  or 
other  satisfactory  evidence  of  a  different  ownership  or  by 
information  that  would  put  the  corporation  "on  notice." 
Therefore,  even  though  it  proves  later  that  the  holder  of 
record  is  not  the  rightful  owner  of  the  dividend,  the  treasurer 
and  the  corporation  are  protected  in  payments  made  according 
to  the  unimpeached  record  of  the  stock  books.  They  have 
used  all  reasonable  care  and  cannot  be  held  for  the  results  of 
negligence  on  the  part  of  others.^^ 

If,  however,  the  treasurer  or  the  corporation  receives 
notice  of  some  unrecorded  transfer  involving  the  ownership 
of  the  dividend,  i.e.,  a  transfer  made  before  the  dividend  be- 
came effective  or  perhaps  thereafter  with  an  assignment  of  the 
dividend,  he  is  bound  to  take  notice  of  the  facts  and  pay  the 
dividend  to  the  rightful  owner. ^^ 

As  the  stock  books,  if  unimpeached,  control  absolutely, 
the  production  of  a  stockholder's  certificate  of  stock  is  not 


"  Cleveland,  etc.,  R.   R.  v.   Robbins,  35   O.   St.  483  (i{ 
"  Rose  V.  Barclay,  191  Pa.  St.  594  (1899), 


4i6  THE    CORPORATE   FINANCES 

necessary,  nor  can  it  be  required  to  prove  his  ownership  either 
of  stock  or  of  dividends  if  this  ownership  is  shown  by  the 
stock  books.  If  the  true  ownership  is  not  so  shown,  the  duly 
assigned  certificate  is  good  evidence  thereof  and  sufficient  to 
justify  the  treasurer  in  paying  the  dividend  to  the  owner  of 
the  certificate,  provided  only  that  the  assignment  was  made 
before  the  effective  date  of  the  dividend. 

If  there  is  any  real  doubt  as  to  whom  a  dividend  is  prop- 
erly payable,  the  treasurer's  only  safe  course  is  to  withhold 
payment  until  the  matter  is  satisfactorily  settled  by  the  parties 
themselves,  or  until  the  ownership  of  the  dividend  is  deter- 
mined by  proper  legal  procedure.  This  litigation  may  involve 
only  the  disputants  but  may  be  directed  also  against  the  cor- 
poration. If  in  any  case  the  corporation  is  likely  to  suffer,  it 
may  interplead  and  ask  the  court  to  decide  to  whom  the  divi- 
dend belongs. 

In  case  stock  stands  in  the  name  of  a  married  woman,  the 
treasurer  must  pay  the  dividends  declared  thereon  to  the  wife 
or  to  the  husband  according  to  the  requirements  of  the  state  in 
which  the  corporation  is  chartered. ^^  In  most  states  of  the 
Union  dividends  are  payable  to  the  wife  when  stock  stands  in 
her  name. 

If  stock  is  pledged,  the  pledgee  is  entitled  to  any  dividends 
declared  meanwhile  even  though  he  is  not  a  stockholder  of 
record,  provided  the  corporation  has  had  due  notice  of  the 
pledge.  But  the  pledgee  must  account  for  these  dividends  to 
the  pledgor  when  the  pledge  is  redeemed.^^ 

If  a  corporation  holds  stock  of  other  corporations,  it  is 
entitled  to  receive  dividends  on  this  stock  as  is  any  other  stock- 
holder. It  cannot,  however,  pay  dividends  on  its  own  stock 
held  in  the  treasury  of  the  corporation.  When  dividends  are 
payable  to  a  corporation  the  dividend  check  may  be  made 


w  Graham  v.  First  Nat.   Bank  of  Norfolk,  84  N.  Y.  395  (i83i). 
W^   Cook   on    Corps.,    468. 


DIVIDENDS 


417 


either  in  the  name  of  the  corporation,  or  to  the  treasurer  as 
treasurer  of  the  corporation.  If  stock  belongs  to  an  estate, 
payment  of  dividends  should  be  made  to  the  administrator. 
If,  however,  the  stock  passes  to  a  legatee,  all  dividends  de- 
clared after  the  date  of  the  testator's  death  belong  to  the 
legatee,  but  if  any  dividends  have  been  declared  before  that 
date  but  are  not  yet  paid,  they  will  belong  to  the  general  estate. 

§  376.     Payment  of  Dividends 

It  is  customary  to  close  the  stock  books  a  certain  number 
of  days  before  a  dividend  is  to  be  paid,  in  order  to  give  the 
treasurer  an  undisturbed  opportunity  to  make  up  his  dividend 
statement  from  the  books.  The  "closed"  period  usually  begins 
on  the  effective  date  of  the  dividend  and  continues  until  the 
date  of  its  payment,  or  if  this  period  is  lengthy,  for  such 
reasonable  time  as  will  enable  the  treasurer  to  secure  from  the 
books  the  data  he  requires  for  his  dividend  statement.  During 
this  period  no  transfers  of  stock  will  be  made. 

As  a  rule  the  closing  of  the  transfer  books  works  no 
hardship.  They  are  not  usually  closed  until  the  day  on  which 
the  dividend  is  effective.  Transfers  of  stock  made  after  that 
date  do  not,  therefore,  carry  the  dividend,  unless  by  special 
agreement  between  the  parties,  and  the  fact  that  the  transfer 
cannot  be  immediately  recorded  is  in  most  cases  immaterial. 
If  transfers  prior  to  the  declaration  of  the  dividend  have  not 
been  recorded,  they  are,  of  course,  shut  out,  and  to  secure  the 
dividend  which  rightfully  belongs  to  such  unrecorded  stock- 
holders, they  must  file  due  notice  and  evidence  of  the  facts 
with  the  treasurer. 

As  soon  as  the  stock  books  are  closed,  the  treasurer  is 
furnished  by  the  secretary  with  a  list  of  the  stockholders  of 
record  as  they  appear  on  the  date  of  closing,  or  otherwise  the 
stock  books  are  turned  over  to  him  and  he  secures  the  names 
and  the  addresses  of  the  stockholders  himself.    The  treasurer 


4i8  THE    CORPORATE   FINANCES 

then  makes  up  his  dividend  statement,  showing  the  amount  of 
stock  held  by  each  stockholder  and  the  amount  of  dividends 
due  him.  The  checks  for  dividends  are  made  out  and  on  the 
appointed  date  are  mailed  to  the  parties  to  whom  they  are  due, 
or  if  dividend  checks  are  not  mailed,  the  stockholders  are 
notified  to  call  and  receive  their  dividends  in  person. 

In  the  smaller  corporations  the  dividend  check  is  usually 
nothing  more  than  the  ordinary  check  of  the  corporation, 
either  marked  or  stamped  "Dividend  Check,"  or  accompanied 
by  a  brief  notice  stating  that  the  check  is  in  payment  of  the 
specified  dividend.  In  the  larger  corporations  special  checks 
are  usually  printed,   with  the  words   "Dividend   Check"   or 

"Dividend  No "  or  some  other  identifying  phrase 

appearing  on  the  face  of  the  check. 

Where  the  stockholders  call  in  person  for  dividends,  they 
are  usually  required  to  sign  the  regular  receipt  form  upon  the 
dividend  book.  If  the  checks  are  mailed,  receipt  forms  are 
sometimes  sent  with  them,  to  be  signed  and  returned  by  the 
stockholders.  Usually  and  preferably,  however,  the  check 
itself  is   deemed  an  all   sufficient   receipt.     When   stamped 

"Dividend  No "  or  with  some  equivalent  identifying 

phrase,  as  is  usually  the  case,  and  indorsed  by  the  recipient 
as  must  be  done  before  the  check  can  be  collected,  and  stamped 
or  cancelled  by  the  drawee  bank  when  paid,  the  check  itself 
undoubtedly  does  afford  the  best  possible  evidence  of  the  pay- 
ment of  the  dividend.  The  check  is  usually  accompanied  by 
a  notice  that  a  receipt  either  is  or  is  not  required,  as  the  case 
may  be. 

The  dividend  check  is  in  no  wise  different  in  its  nature 
from  any  other  corporate  check.  It  should  be  deposited  or 
otherwise  presented  for  payment  promptly,  and  if  this  is  not 
done,  the  recipient  must  bear  any  loss  accreditable  to  such 
delay  in  presentation.  The  dividend  check  is  also  subject 
to  all  the  usual  customs  and  requirements  relating  to  checks. 


DIVIDENDS  419 

§  377.     Illegal  Dividends 

The  declaration  of  an  illegal  dividend  or  the  payment  of 
an  illegal  dividend  already  declared  may  be  enjoined  and 
stopped  by  proper  action  of  the  stockholders. 

Illegal  dividends  may  be  of  three  characters: 

1.  Those  declared  in  disregard  of  the  rights  of  some  of 

the  stockholders. 

2.  Those  declared  in  violation  of  charter  or  by-law  pro- 

visions of  the  particular  corporation. 

3.  Those    which    either    impair    the    capital    stock    or 

threaten  the  solvency  of  the  corporation. 

1.  Dividends  which  are  unequal  among  stockholders  of  the 
same  class  are  absolutely  in  disregard  of  the  rights  of  the 
stockholders  discriminated  against — so  much  so  that  cases  di- 
rectly involving  the  principle  but  seldom  arise.  When  inequal- 
ities are  attempted  it  is  usually  by  means  of  diversions  of  the 
profits,  such  as  payments  of  excessive  salaries  or  unnecessary 
expenditures. 

Another  instance  of  dividends  in  disregard  of  the  rights  of 
stockholders  is  sometimes  found  when  the  directors  declare 
dividends  on  common  stock  while  cumulative  dividends  due  on 
preferred  stock  have  not  been  paid.  In  such  a  case  the  court 
will  compel  a  readjustment  of  the  dividends.^^ 

2.  Dividends  declared  in  violation  of  charter  or  by-law  pro- 
visions may  be  perfectly  proper  in  themselves  but  illegal 
merely  because  of  their  prohibition.  Thus,  the  charter  or  by- 
laws may  provide  that  no  dividend  shall  be  declared  until 
after  surplus  funds  have  been  accumulated  to  some  specified 
amount.  Then  if  dividends  are  declared  before  this  surplus 
has  been  reserved,  they  are  illegal  and  payment  may  be  en- 
joined by  proper  action  of  the  stockholders. 

3.  The  most  common  form  of  illegal  dividends  is  that 


«>Luling  V.   Atl.   Mut.   Ins.   Co.,  45   Barb.   510   (1865). 


420  THE    CORPORATE    FINANCES 

which  impairs  the  capital  stock  or  which  endangers  the  sol- 
vency of  the  corporation.  In  a  case  of  this  kind  it  is  to  some 
extent  a  matter  of  bookkeeping  and  judgment  as  to  whether  a 
dividend  is  such  as  to  impair  the  capital  stock  or  render  the 
company  insolvent.  If  the  directors  declare  a  dividend  in 
good  faith,  after  a  proper  investigation  of  the  financial  condi- 
tion of  the  company,  the  courts  are  not  likely  to  interfere. 

A  case  of  illegal  dividends  comes  within  the  jurisdiction 
of  courts  of  equity,  and  any  stockholder  may  bring  suit  therein 
to  enjoin  the  declaration  of  a  dividend  believed  by  him  to  be 
illegal.  If  the  dividend  has  been  declared  but  not  paid,  all 
the  stockholders  must  be  joined  as  parties.  An  illegal  divi- 
dend may  be  rescinded  by  the  directors  at  any  time  before  its 
payment. 

§  378.     Liability  for  Illegal  Dividends 

In  most  of  the  states  a  liability  is  imposed  upon  the  direc- 
tors by  statute  for  any  violation  of  the  laws  regulating  divi- 
dends. In  some  cases  offending  directors  are  made  liable  for 
any  and  all  debts  of  the  corporation  incurred  during  their 
term  of  office.  In  other  cases  they  are  liable  only  for  the 
amount  actually  paid  out  in  these  illegal  dividends.  In  some 
states  they  are  held  liable  not  only  for  the  corporate  debts, 
or  for  restitution  in  case  of  dividends  illegally  declared,  but 
are  also  guilty  of  a  misdemeanor  punishable  by  fine  and  im- 
prisonment. 

As  a  rule,  the  treasurer  is  not  personally  liable  in  any  way 
for  the  payment  of  dividends  ordered  by  the  directors  unless 
he  knows  such  dividends  to  be  absolutely  fraudulent.  In  a 
few  states,  however,  liability  for  dividends  prohibited  by 
statute  has  been  extended  by  express  enactment  to  the  execu- 
tive offfcers  of  the  corporation  if  they  consent  or  concur 
therein.  In  such  states,  if  the  treasurer,  knowing  the  dividends 
to  be  in  violation  of  the  statutory  provision,  nevertheless  obeys 


DIVIDENDS  421 

the  instructions  of  the  directors  and  either  pays  such  divi- 
dends or  permits  them  to  be  paid,  he  is  liable  with  the  directors. 
There  are,  it  may  be  said,  but  few  states  in  which  this  liability 
exists. 

If  the  directors  of  a  corporation  declare  a  dividend  in 
violation  of  its  charter  or  by-law  provisions,  they  may  be  en- 
joined from  its  payment,  or  if  not,  would  undoubtedly  be  held 
liable  for  any  resulting  damage  to  the  corporation. 

When  dividends  are  declared  which  impair  the  capital 
stock  or  render  the  corporation  insolvent,  they  not  only  sub- 
ject the  directors  to  liabilities  and  in  some  cases  penalties,  but 
such  illegal  dividends  may  be  recovered  from  the  stockholders 
to  whom  they  were  paid.  "It  is  the  well  determined  doctrine 
of  the  courts  of  this  country  that  the  capital  stock  is  a  fund 
to  be  preserved  for  the  benefit  of  corporate  creditors.  Hence 
the  rule  has  been  firmly  established  that  where  dividends  are 
paid  in  whole  or  in  part  out  of  the  capital  stock,  corporate 
creditors  being  such  when  the  dividend  was  declared  or  becom- 
ing such  at  any  subsequent  time,  may  to  the  extent  of  their 
claims,  if  such  claims  are  not  otherwise  paid,  compel  the  share- 
holders to  whom  the  dividend  has  been  paid  to  refund  what- 
ever portion  of  the  dividend  was  taken  out  of  the  capital 
stock."  '' 

If  a  dividend  has  been  paid  out  of  the  capital  stock,  the 
stockholders  are  conclusively  presumed  to  have  known  it  and 
are  liable  to  an  action  for  repayment.  They  cannot  claim  to 
hold  the  position  of  innocent  or  bona  fide  holders. 

§  379-     Treasurer's  Liability  as  to  Dividends 

As  already  said,  in  some  few  states  the  officers  are  to- 
gether with  the  directors  liable  for  dividends  paid  in  violation 
of  statutory  provisions.  As  a  rule,  however,  the  declaration 
and  payment  of  dividends  is  one  so  entirely  within  the  prov- 


'^  2  Cook   on  Corps.,   §548. 


422 


THE    CORPORATE    FINANCES 


ince  and  discretion  of  the  board  that  the  treasurer  is  not 
held  liable  for  any  dividends  paid  in  accordance  with  the 
board's  directions,  unless  they  should  be  absolutely  fraudu- 
lent. 

The  treasurer  usually  furnishes  to  the  directors  the  state- 
ment of  the  corporate  accounts  and  finances  which  determines 
whether  or  not  dividends  shall  be  declared.  It  is  his  duty  to 
provide  an  accurate  statement  and,  should  his  presentment  be 
so  erroneous  or  so  carelessly  compiled  as  to  mislead  the  direc- 
tors and  cause  the  declaration  and  payment  of  improper  divi- 
dends, he  would  have  failed  in  the  "due  diligence"  and 
reasonable  care  exacted  of  the  treasurer  as  an  agent  of  the  cor- 
poration and  would  be  liable  for  any  resulting  loss. 

Beyond  this  the  treasurer  is  also  responsible  for  the 
proper  payment  of  dividends,  not  only  as  to  the  actual  compu- 
tation of  amounts  due  and  the  proper  drawing  of  the  dividend 
checks,  but  for  their  delivery  to  the  proper  persons. 


CHAPTER   LI 

BONDS 

§  380.     Nature  of  a  Bond 

When  a  corporation  borrows  money,  its  indebtedness  may- 
be evidenced  by  either  notes  or  bonds.  If  the  amount  bor- 
rowed is  small,  or  if  it  is  borrowed  in  a  single  sum,  or  but 
from  few  persons,  or  for  a  short  time,  notes  are  usually 
given.  If,  however,  the  amount  is  large  and  obtained  from  a 
number  of  people  and  extends  over  a  period  of  years,  the  cor- 
porate obligation  is  preferably  and  usually  evidenced  by  bonds. 

The  difference  between  a  corporate  note  and  a  bond  is  not 
always  clearly  marked.  Both  are  promises  to  pay  money. 
The  phrasing  of  the  bond  is  usually  more  formal  than  that  of 
the  note.  Also  it  must  be  executed  under  seal  while  the  cor- 
porate note  need  not.  Also  payment  of  bonds  is  usually, 
though  not  invariably,  secured  as  to  both  principal  and  inter- 
est by  certain  specified  property  held  for  the  purpose  under 
a  formal  deed  of  trust. 

A  bond  payable  to  order,  or  bearer,  or  holder  is  a  nego- 
tiable instrument  and  this  in  spite  of  the  fact  that  it  is  executed 
under  seal.  Hence,  if  such  a  bond  is  in  due  form  and  is  pur- 
chased for  value  and  in  good  faith,  the  purchaser  is  protected 
against  any  defenses  set  up  by  the  corporation  and  against 
any  claims  of  previous  owners. 

A  bond  issue  consists  of  a  number  of  bonds  which,  while 
they  may  vary  as  to  denomination,  and  some  may  be  reg- 
istered and  some  unregistered,  are  all  of  like  general  tenor, 
and  if  secured  are  all  secured,  and,  unless  otherwise  expressly 
provided,  equally  secured,  under  one  deed  of  trust. 

Bonds  are  issued  in  varying  denominations  but  those  of 

423 


424  THE    CORPORATE    FINANCES 

the  larger  corporations  are  usually  of  $i,ooo  denomination  and 
issued  in  coupon  form.  $500  bonds  are  not  infrequently  is- 
sued and  $100  bonds  are  seen  occasionally. 

Coupon  bonds  usually  have  a  space  for  the  recording  by 
the  company  of  the  name  of  the  bond  owner  when  the  latter 
so  desires,  the  company  or  its  fiscal  agents  keeping  a  record 
of  all  such  registrations.  Such  bonds  are  termed  "registered 
as  to  principal  only"  and,  until  registered  "to  bearer,''  nego- 
tiability by  delivery  ceases.  The  interest  instalments  on  such 
bonds  continue  to  be  represented  by  coupons  which  are  pay- 
able CO  bearer.  Coupon  bonds  can  usually  be  exchanged  for 
"fully  registered  bonds"  without  coupons,  these  usually  being 
issued  in  denominations  of  $1,000,  $5,000,  $10,000,  and  even 
larger.  The  interest  on  fully  registered  bonds  is  paid  by 
check,  as  in  the  case  of  dividends  on  stocks,  to  the  holder  of 
record. 

The  advantage  of  the  unregistered  coupon  bond  is  found 
in  the  readiness  with  which  it  may  be  transferred.  The  ad- 
vantage of  a  registered  bond  lies  in  the  difficulty  of  its  nego- 
tiation in  case  the  bond  is  lost  or  stolen.  If  a  bond  payable 
to  bearer  is  either  lost  or  stolen,  its  sale  or  disposal  is  com- 
paratively easy  and,  once  in  the  hands  of  an  innocent  holder 
for  value,  the  stolen  bond  is  valid.  A  registered  bond,  on 
the  contrary,  should  it  be  lost  or  stolen,  is  practically  non- 
negotiable.  It  is  payable  only  to  the  party  named  in  the  bond, 
and  a  successful  negotiation  of  the  bond  involves  a  forgery 
of  his  signature  which  would  prevent  a  valid  transfer. 

When  registered  bonds  are  assigned,  the  assignee  usually 
surrenders  the  old  bond  and  receives  in  exchange  a  bond 
issued  in  his  own  name,  the  new  ownership  being  recorded 
upon  the  books  of  the  company  at  the  same  time. 

Bonds  are  a  direct  corporate  obligation  and  do  not  in  any 
way  partake  of  the  nature  of  stock.  They  may,  however,  be 
given  rights  of  participation  in  corporate  profits  if  desired, 


BONDS  425 

and,  In  the  absence  of  statutory  prohibition,  may  be  given 
voting  rights  as  well.  But  even  though  this  last  privilege  is 
extended,  it  is  rarely  exercised  if  the  bonds  are  in  coupon 
form  and  widely  scattered. 

§  381.     Authorization  of  Bond  Issues 

'The  power  of  a  corporation  to  borrow  money  is  implied 
and  exists  without  being  expressly  granted  by  charter  or 
statutes."^  In  the  absence  of  restraining  laws,  a  corporation 
may  therefore  issue  corporate  notes  and  bonds  to  any  de- 
sired amount. 

In  most  states,  however,  constitutional  or  statutory  provi- 
sions are  found  directly  limiting  or  otherwise  affecting  the 
common  law  right  of  corporations  to  borrow  money  or  incur 
debt,  particularly  by  the  issue  of  bonds,  and  in  many  states 
statutes  prohibit  the  directors  from  issuing  bonds  until  author- 
ized thereto  by  the  stockholders. 

§  382.     Statutory  Provisions 

Constitutional  provisions  affecting  the  issue  of  bonds  are 
found  in  many  states  but  as  a  rule  confine  themselves  to  the 
requirement  that  bonds  shall  be  issued  for  value  only  and  that 
any  fictitious  increase  of  indebtedness  is  void. 

Statutory  provisions  limiting  the  amount  of  corporate  in- 
debtedness are  found  in  many  states.  Thus  in  Florida,  Ken- 
tucky, Minnesota,  and  some  other  states,  the  maximum  cor- 
porate indebtedness  that  may  be  incurred  must  be  stated  in 
the  charter.  In  Colorado,  California,  Idaho,  Illinois,  and  a 
number  of  other  states  the  corporate  indebtedness  must  not 
exceed  the  amount  of  the  capital  stock.  In  other  states,  as 
Nebraska  and  Vermont,  the  corporate  indebtedness  must  not 
exceed  two-thirds  of  the  capital  stock.  In  New  Hampshire 
it  may  not  exceed  one-half  the  value  of  the  company  assets. 

Provisions  requiring  the  assent  of  a  specified  majority  of 


*  3  Cook  on  Corps.,  §  760. 


426 


THE    CORPORATE    FINANCES 


the  stockholders  before  bonds  may  be  issued  are  also  found  in 
many  states.  Thus  in  California,  Nevada,  New  York,  and 
other  states,  a  bond  issue  must  be  authorized  by  a  two-thirds 
vote  of  the  stockholders.  In  Alabama,  Missouri,  Pennsyl- 
vania, and  a  number  of  other  states,  it  may  be  authorized  by 
a  mere  majority  of  the  voting  stock.  In  Ohio  a  three- fourths 
vote  of  the  stockholders  is  required  before  convertible  bonds 
may  be  issued.  The  statutory  provisions  also  frequently  spe- 
cify the  notice  which  must  be  given  for  stockholders'  meet- 
ings to  authorize  bond  issues. 

In  some  states  specific  provisions  exist  as  to  the  selling 
price  of  bonds,  as  in  North  Carolina  where  the  statutes  pro- 
vide that  bonds  may  be  sold  below  par  and  commissions  may 
be  paid  upon  the  sale,  or  in  Wisconsin  where  the  true  value 
of  the  money,  labor,  or  property  received  for  bonds  must  be 
at  least  75  per  cent  of  their  par  value.  The  Wisconsin  pro- 
vision, it  must  be  added,  is  somewhat  weakened  by  the  further 
enactment  that,  notwithstanding  its  terms,  bonds  may  be  sold 
at  the  best  price  obtainable  on  the  stock  exchanges  of  Chicago, 
New  York,  Boston,  or  Philadelphia. 

Special  provisions  as  to  bond  issues  are  found  in  some 
states,  as  in  Louisiana,  New  Mexico,  Nevada,  Missouri,  New 
Jersey,  and  Ohio,  where  the  statutes  expressly  authorize  the 
issue — imder  proper  procedure — of  bonds  convertible  into 
stock;  or  in  Delaware,  where  bondholders  may  be  given  the 
same  rights  as  stockholders ;  or  in  Nevada  and  Virginia,  where 
by  proper  procedure  bondholders  may  be  given  the  right  to 
vote.  It  may  be  noted  that  the  Illinois  courts  hold  that  bond- 
holders cannot  be  given  the  right  to  vote  at  corporate  meetings. 

§  383.     Debentures 

The  payment  of  corporate  bonds  may  be  either  secured 
or  unsecured.  If  unsecured,  the  bonds  are  usually  termed 
"debentures," 


BONDS 


427 


The  usual  unsecured  debenture  bond  is  merely  the  formal 
corporate  promise  to  pay  money.  It  is  an  obligation  of  the 
corporation  but,  as  it  is  unsecured,  there  can  be  no  foreclosure 
in  case  of  default  on  either  interest  or  principal.  In  such  case 
the  holder  has  no  remedy  except  the  ordinary  suit  at  law  on 
an  unpaid  note.  It  is  merely  an  unsecured  debt  of  the  cor- 
poration and  has  no  precedence  over  any  other  unsecured  debt. 
Its  claim  is  superior  to  that  of  preferred  stock  but  is  inferior 
to  that  of  any  secured  indebtedness  of  the  corporation.  Its 
value  depends  entirely  upon  the  financial  strength  of  the  is- 
suing corporation. 

Sometimes  bonds  are  secured  by  the  deposit  with  a  trus- 
tee of  collateral  security — usually  stocks  and  bonds  of  other 
corporations.  The  bond  is  then  in  effect  a  collateral  note  and 
is  frequently  termed  a  "collateral  trust  bond." 

§  384.     Mortgage  Bonds 

A  mortgage  bond  is  one  the  payment  of  which  is  secured 
by  a  mortgage  or  deed  of  trust  on  part  or  all  of  the  property 
of  the  corporation.  This  deed  of  trust  usually  authorizes  the 
trustees,  in  case  of  default  on  interest  or  principal  of  the 
secured  bonds,  to  take  possession  of  the  property  and  either 
operate  it  or  sell  it,  as  may  be  provided,  for  the  benefit  of  the 
bondholders. 

"Mortgage"  bonds  are  in  effect  first  mortgage,  second 
mortgage,  etc.,  according  to  the  lien  of  the  deed  of  trust  by 
which  they  are  secured.  But  unfortunately  a  so-called  first 
mortgage  bond  is  not  always  what  its  name  implies,  as  it  may 
be  preceded  by  a  prior  lien  mortgage  securing  bonds  senior  in 
lien  to  those  issued  under  the  so-called  first  mortgage.  A 
notable  instance  of  this  is  the  Toledo,  St.  Louis,  and  Western 
first  mortgage  4  per  cent  bonds,  which  are  actually  junior  in 
lien  to  a  larger  issue  of  3^  per  cent  bonds. 

A  second  mortgage  bond  secured  on  the  same  property 


428  THE    CORPORATE    FINANCES  v 

as  that  already  covered  by  one  mortgage  is  a  second  lien,  i.  e., 
in  case  of  foreclosure  the  first  mortgage  bonds  must  be  paid  in 
full,  both  principal  and  interest,  before  the  holders  of  the 
second  mortgage  bonds  receive  anything.  Hence,  real  first 
mortgage  bonds  are  more  desirable  than  those  of  a  junior  lien, 
i.e.,  those  of  an  inferior  or  later  lien,  unless  the  property  is 
of  such  value  as  to  be  an  absolute  and  unquestionable  security 
for  the  entire  amount  of  outstanding  bonds ;  but  a  bondholder 
must  ascertain  that  the  so-called  first  mortgage  bond  is  actually 
a  first  mortgage  or  first  lien,  and  not  such  in  name  only. 

§  385.     Coupon  Bonds 

Coupons  are  in  effect  promissory  notes,  each  calling  for 
the  payment  of  one  instalment  of  interest  on  a  bond.  A  cou- 
pon bond  is  one  to  which  such  coupons  are  attached,  each  cou- 
pon requiring  payment  on  its  due  date  of  the  interest  instal- 
ment represented  by  that  particular  coupon.  The  interest  on 
such  bonds  is  payable  to  the  holders  of  these  coupons  and  not 
to  the  holder  or  owner  of  the  bonds. 

Interest  on  bonds  is  usually  payable  semiannually,  and 
each  of  the  coupons  attached  to  a  coupon  bond  calls  for  the 
exact  amount  of  one  of  the  semiannual  interest  payments  on 
that  bond.  (See  Form  199.)  Thus  a  bond  running  ten  years 
with  interest  payable  semiannually  would  have  attached  to 
it  twenty  coupons.  Each  coupon  is  numbered  to  correspond 
with  its  bond  but  also  has  a  serial  number — running  from 
one  to  twenty  in  the  instance  cited — indicating  the  order  in 
,  which  the  coupons  come  due. 

§  386.     Form  of  Bond 

The  language  of  a  bond  is  usually  more  formal  than  that 
of  a  note,  it  must  be  executed  under  seal,  and,  if  secured, 
reference  is  made  in  the  bond  itself  to  the  deed  of  trust  under 
which  it  is  issued. 


BONDS  429 

Usually  a  statement  of  the  general  conditions  of  a  bond 
issue  appears  upon  the  face  of  each  bond  and  reference  is 
made  to  any  features  of  special  importance,  such  as  the  exis- 
tence of  a  sinking  fund,  the  conditions  of  redemption,  the 
method  of  transfer  and  exchange  when  bonds  payable  to 
bearer  and  registered  bonds  are  issued  under  the  same  deed 
of  trust,  etc.,  etc.     (See  Form  198.) 

§  387.     Form  and  Nature  of  Coupon 

A  coupon  is  in  form  a  promissory  note.  (See  Form  199.) 
It  is  attached  to  the  bond  as  a  convenient  method  of  indicating 
the  amount  and  the  due  date  of  interest  and  for  its  collection 
when  due.  One  coupon  is  attached  to  the  bond  for  each  inter- 
est instalment.  Thus  a  twenty-year  bond  with  semiannual 
interest  payments  would  carry  forty  coupons.  These  coupons 
are  numbered  serially  and  also  carry  the  number  of  the  bond 
to  which  they  are  attached.  Coupon  No.  i  represents  the 
interest  that  will  be  due  at  the  first  interest  period.  As  soon  as 
that  period  arrives  the  coupon  matures  and  it  is  then  detached 
from  the  bond  and  either  presented  for  payment  or  deposited 
for  collection  as  would  be  done  with  any  other  promissory 
note. 

When  an  interest  payment  on  coupon  bonds  is  about  to 
fall  due,  the  amount  necessary  to  meet  the  maturing  coupons 
is  usually  deposited  in  some  designated  bank  which  acts  for 
the  corporation  and  pays  the  coupons  as  they  are  presented. 
The  coupons  are  then  cancelled  and  are  pasted  in  the  coupon 
register. 

§  388.     Trustee's  Certificate 

Bonds  issued  under  a  deed  of  trust  must  usually  be  cer- 
tified by  the  trustee  before  they  are  issued.  The  trustee's 
certificate  appears  on  the  back  of  each  bond,  and  evidences 
the  fact  that  the  bond  is  one  of  the  issue  mentioned  in  the 


430 


THE    CORPORATE    FINANCES 


deed  of  trust.  (See  Form  200.)  As  a  rule,  the  object  of  this 
certificate  is  merely  to  identify  the  bond  and  to  prevent  over- 
issues. If  the  trustee  certifies  more  bonds  than  are  called  for 
by  the  deed  of  trust,  he  may  make  himself  personally  respon- 
sible for  the  overissue,  but  otherwise  he  incurs  no  liability 
whatsoever  by  reason  of  his  certification. 

A  certification  is  not  part  of  the  bond,  though  it  may  be 
required  before  the  bond  itself  can  be  considered  as  issued, 
nor  is  it  in  any  sense  an  indorsement  of  the  bond  nor  a  cer- 
tification of  its  correctness  as  to  form  or  subject  matter. 

§  389.     Deeds  of  Trust 

A  deed  of  trust  is  a  mortgage  on  certain  specified  property 
given  to  a  trustee  who  acts  for  the  holders  of  the  bonds  secured 
thereby.  The  deed  of  trust  recites  at  length  the  terms  and  con- 
ditions under  which  the  bonds  are  issued  and  under  which  the 
property  for  their  security  is  held.     (See  Form  201.) 

A  modern  deed  of  trust  is  usually  a  very  comprehensive 
and  formidable  instrument.  A  brief  form  may  occupy  per- 
haps from  ten  to  twenty  pages  of  printed  matter.  More  ex- 
tended forms  frequently  occupy  one  hundred  pages  or  more. 

In  the  bond  itself  reference  is  always  made  to  the  deed 
of  trust  by  which  it  is  secured,  and  in  the  deed  of  trust  the 
bond  is  recited  in  full.  The  bond  by  express  terms  is  sub- 
jected to  the  conditions  of  the  deed  of  trust.  Accordingly 
the  statements  of  the  bond  are  controlled  by  the  explanations 
and  any  non-conflicting  conditions  of  the  deed  of  trust.  If, 
however,  the  terms  of  the  bond  and  of  the  deed  of  trust  con- 
flict, the  bond  prevails.^ 

If  the  deed  of  trust  fails  for  any  reason,  the  bonds  then 
become  the  unsecured  obligation  of  the  corporation  and  take 
their  place  on  a  parity  with  the  other  unsecured  corporate 
debts. 


»  Railway  Co.  v.  Sprague,  lo^  U.  S,  756  (1880). 


BONDS 


431 


§  390.     Recitals  of  Deed  of  Trust 

In  the  deed  of  trust  usually  employed  the  preamble  recites 
the  conditions  precedent  to  the  issue,  the  form  of  bond  in 
full,  and  the  form  of  coupon  and  trustee's  certificate,  also  in 
full,  followed  by  the  granting  clauses,  including  description 
of  property  covered,  and  by  the  trust  reservation  with  stipula- 
tion for  equal  participation  of  all  the  bonds  of  that  issue  in 
the  protection  afforded  by  the  mortgaged  property. 

Following  this  come  the  "covenants,  conditions,  uses,  and 
trusts"  subject  to  which  the  bonds  are  issued  and  the  mort- 
gaged property  is  held.  These  have  a  wide  range.  Some  of 
the  more  usual  are  as  follows : 

1.  Procedure  for  execution,  certification,  and  delivery 

of  bonds. 

2.  Enjoyment  of  property  by  mortgagor  until  default  in 

payment. 

3.  Payment  of  principal  and  interest  without   deduc- 

tion for  taxes,  and  in  "gold  coin,"  "legal  tender" 
or  otherwise,  as  the  case  may  be. 

4.  Payment  of  all  taxes  and  assessments  on  property 

held  under  the  deed  of  trust  and,  if  the  nature  of 
the  property  is  such  as  to  require  it,  maintenance 
of  the  same  in  repair,  under  due  insurance  and  free 
from  liens. 

5.  Provision  for  any  necessary  additional  assurances  for 

protection  of  bondholders. 

6.  Provision  for  trustee  to  enter  upon  property  and  con- 

duct business  without  foreclosure  under  certain 
conditions. 

7.  Sinking  fund  for  retirement  of  bonds. 

8.  Procedure  for  foreclosure  in  case  of  default. 

9.  Provision  that  bonds  shall  be  matured  by  failure  to 

pay  interest. 


432  THE    CORPORATE    FINANCES 

10.  Stipulation  that  loans,  advances,  or  payments  made 

on  coupons  for  account  of  the  mortgagee  shall  not 
keep  such  coupons  alive. 

11.  Provision  for  redemption  of  bonds. 

12.  Provision  for  discharge  of  deed  of  trust. 

13.  Provision    for  substitution   or   appointment  of  new 

trustee. 

14.  Disclaimer  of  responsibility  on  part  of  trustee. 

15.  Interpretation  of  terms  used  in  deed  of  trust 

16.  Provision  that   deed   of   trust   may  be   executed   in 

duplicate  parts. 

In  addition  to  these  common  provisions,  others  are  often 
dictated  by  particular  conditions.  Thus,  if  both  registered 
and  coupon  bonds  are  issued,  provision  must  be  made  for  reg- 
istration and  for  the  exchange  of  one  for  the  other  if  this  is 
prescribed;  also  provisions  may  be  inserted  for  the  issue  of 
temporary  certificates,  or  for  replacement  of  destroyed  or  mu- 
tilated bonds,  or  for  discrimination  against  coupons  detached 
or  assigned  before  maturity,  or  for  exemption  of  the  stock- 
holders and  officers  of  the  issuing  company  from  all  liability 
under  the  deed  of  trust  or  for  the  bonds  issued  thereunder; 
or  in  a  mortgage  on  realty  it  may  be  provided  that  upon  pay- 
ment to  the  trustee  of  a  certain  specified  price,  parts  of  the 
property  may  be  sold  free  from  the  incumbrance  of  the  mort- 
gage, or  that  under  prescribed  conditions  properties  may  be 
withdrawn  from  the  mortgage  and  new  properties  substituted 
in  their  place. 

The  duties  of  the  trustee  under  a  deed  of  trust  are  usually 
few  but  may  be  onerous.  He  certifies  each  bond  issued.  At 
times  the  recording  of  the  deed  of  trust  is  made  one  of  his 
duties.  In  case  of  default  he  is  usually  required  either  to  take 
possession  of  the  property  and  operate  it  or  sell  it,  according 
to  the  conditions  of  the  deed  of  trust,  for  the  benefit  of  the 


BONDS  433 

bondholders.     If  called  upon  to  operate  the  property,  his 
duties  and  liabilities  may  be  heavy. 

§  391.     Execution  and  Filing  of  Deed  of  Trust 

The  deed  of  trust  is  executed  with  the  same  formality 
as  a  deed  of  land.  It  must  be  signed  and  sealed  both  by  the 
corporation  and  by  the  trustee,  and  be  duly  acknowledged  be- 
fore a  notary  public  or  other  duly  authorized  officer.  The  cor- 
porate signature  is  usually  affixed  by  the  president  and  the 
corporate  seal  is  affixed  and  attested  by  the  secretary.  The  ac- 
knowledgment is  also  usually  made  by  the  president  of  the 
corporation,  but  is  of  equal  force  if  made  by  the  secretary, 
treasurer,  or  any  other  duly  authorized  executive  officer.  It 
is  immaterial  whether  the  deed  of  trust  be  executed  within 
the  state  in  which  the  corporation  was  organized  or  elsewhere. 

If  realty  is  included  the  deed  of  trust  must  be  filed  in 
the  office  of  the  county  clerk  in  every  county  in  which  the 
real  estate  is  situated. 

§  392.     Sinking  Fund 

A  sinking  fund  as  applied  to  bond  issues  is  a  fund  created 
for  the  purpose  of  redeeming  the  bonds  when  due,  or  prior 
thereto,  as  may  be  provided  by  the  deed  of  trust.  Thus,  bonds 
may  be  retired  from  time  to  time  as  the  sinking  fund  accumu- 
lates, or  the  fund  may  be  allowed  to  remain  intact  until  the 
maturity  of  the  bonds,  when,  if  properly  constituted  and  main- 
tained, it  is  sufficient  for  the  retirement  of  the  issue. 

Sinking  fund  requirements  will  vary  with  the  conditions. 
Sometimes  a  stated  annual  amount  is  paid  into  the  fund.  At 
other  times  the  income  from  a  certain  source  will  be  devoted 
to  this  purpose.  Coal  mining  companies  frequently  reserve  a 
certain  amount  for  each  ton  of  coal  mined.  Lumber  companies 
sometimes  reserve  a  certain  amount  on  each  thousand  feet  of 
lumber  cut. 


434  '^^^   CORPORATE   FINANCES 

In  the  smaller  corporations  the  sinking  fund  is  usually 
informal  and  is  kept  in  the  custody  of  the  corporation.  For 
the  larger  bond  issues,  a  sinking  fund  is  usually  established 
in  the  hands  of  a  special  trustee,  who  holds  it  subject  to  the 
conditions  of  the  deed  of  trust. 

The  wisdom  of  a  sinking  fund  is,  in  the  case  of  most  bond 
issues,  apparent.  Reserving  as  it  does  a  moderate  amoimt 
each  year  for  the  payment  of  the  bonds,  their  final  redemption 
is  effected  with  comparative  ease.  Without  such  a  fund  an- 
other bond  issue  to  retire  the  maturing  bonds,  or  a  default, 
would  be  the  probable  result. 

In  the  case  of  railroads  there  is  a  tendency  to  dispense 
with  sinking  funds  when  bonds  are  issued  for  permanent  addi- 
tions or  improvements,  the  bonds  when  due  being  replaced  by 
a  second  issue.  This  is  based  upon  the  principle  that  the 
additions  or  improvements  being  permanent  and  being  main- 
tained out  of  earnings,  are  as  much  for  the  benefit  of  subse- 
quent as  of  present  stockholders  and  that  the  present  stock- 
holders should  not  be  deprived  of  their  dividends  merely  to 
provide  a  more  valuable  property  and  larger  dividends  for 
those  who  come  after. 

§  393.     Sale  of  Bonds 

Unless  prevented  by  statutory  enactment,  bonds  may  be 
sold  at  any  price  that  can  be  obtained.  In  most  of  the  states 
there  are  provisions  that  bonds  may  be  issued  only  for  value 
actually  received,  but,  in  the  absence  of  some  more  specific 
limitation,  bonds  may  still  be  issued  below  par  if  in  good  faith. 
In  some  few  states  more  specific  provisions  exist. 

The  sale  of  bonds  below  par  by  the  issuing  corporation 
may,  however,  constitute  an  infraction  of  the  laws  against 
usury.  Thus,  if  a  5  per  cent  bond  on  the  face  value  of  $1,000 
be  sold  for  $500,  the  rate  of  interest  paid  on  the  money  so 
secured  is  10  per  cent.    If,  then,  this  exceeds  the  legal  rate  of 


BONDS  435 

interest  in  the  state  in  which  the  sale  was  made,  the  transaction 
is  usurious  and  illegal,  and  for  this  reason  the  original  pur- 
chaser, or  subsequent  purchaser  knowing  the  conditions, 
might  be  unable  to  enforce  the  payment  of  his  bond.  This 
could  not,  however,  be  the  case  if  the  bonds  were  in  the  hands 
of  an  innocent  holder  for  value,  nor  in  states  in  which  the 
statutes  are  silent  as  to  usury,  nor  in  states  where  bonds 
may  by  statute  provision  be  sold  below  par,  nor  in  states 
where  corporations  are  not  allowed  to  avail  themselves  of  the 
defense  of  usury. 

§  394.     Liabilities  of  Vendor 

The  vendor  of  a  bond  does  not  warrant  the  legality  of 
the  issue  nor  in  any  way  guarantee  payment  of  the  bond.  All 
he  undertakes  is  that  as  far  as  he  has  knowledge  the  bond 
is  legally  issued  and  what  it  purports  to  be,  that  it  has  come 
into  his  hands  in  due  course  and  for  valuable  consideration, 
and  that  he  is  legally  competent  to  transfer  it  to  the  pur- 
chaser. In  this  the  bond  differs  from  a  note,  draft,  or  check, 
which  the  vendor  is  held  to  guarantee  unless  assigned  "with- 
out recourse." 

§  395.     Rights  of  Holders 

A  bond  as  a  negotiable  or  quasi-negotiable  instrument  is 
not  subject  to  the  defenses  that  might  exist  between  the 
original  parties.  In  practice,  **the  courts  go  very  far  in  pro- 
tecting bona  fide  holders  of  corporation  bonds,  and  will  uphold 
and  enforce  such  bonds  under  nearly  all  circumstances.  The 
defense  that  the  bond  was  issued  below  par  does  not  avail  as 
against  a  bona  fide  holder.^ 

A  first  mortgage  bond  does  not  lose  its  priority  though 
issued  after  a  second  mortgage  bond.  Nor  does  the  number 
or  date  of  issue  of  a  bond  in  any  way  affect  its  rights  of  pay- 


=  3  Cook   on   Corps.,    §  -j6S\   also  Dickermann   v.    Northern   Trust   Co.,    176   U.    S. 
188  (1900). 


436 


THE    CORPORATE    FINANCES 


ment  as  regards  the  other  bonds  of  the  same  issue,  unless 
expressly  so  provided  by  the  bond  or  the  deed  of  trust.  Such 
provisions  are  legal  but  unusual  and,  as  a  rule,  every  bond  of 
an  issue  has  all  the  rights  of  any  other  bond  of  that  issue. 

Bonds  cannot  be  paid  by  the  issuing  corporation  before 
they  are  due  save  by  consent  of  the  holders,  unless  there  is 
express  provision  in  the  deed  of  trust  for  such  prior  redemp- 
tion, but  this  does  not  preclude  their  purchase  in  the  open  mar- 
ket prior  to  maturity  by  the  debtor  corporation.  If,  at  the 
maturity  of  the  bonds,  all  are  not  presented  for  payment,  the 
trustee  may  reserve  a  sufficient  amount  of  money  for  the  re- 
tirement of  the  missing  bonds  and  discharge  the  deed  of  trust. 

Suit  may  be  brought  on  a  bond  or  coupon  if  not  paid 
at  maturity,  just  as  suit  may  be  brought  on  a  promissory  note, 
and  this  even  though  the  mortgage  is  not  foreclosed.  In 
case  of  judgment,  however,  no  execution  may  be  had  against 
the  mortgaged  property.  In  some  few  states,  as  in  New  Jer- 
sey, such  suit  by  the  individual  holders  before  foreclosure  is 
forbidden  by  statute. 

In  case  of  foreclosure,  if  the  property  held  under  the 
deed  of  trust  is  not  sufficient  to  pay  the  bonds  secured  thereby, 
the  bondholders  have  recourse  against  the  corporation  for 
the  balance  due. 

§  396.     Redemption  of  Bonds 

The  date  of  maturity  of  bonds  is  stated  in  the  deed  of 
trust  and  also  on  the  face  of  each  bond.  The  deed  of  trust 
also  usually  provides  that  if  any  instalment  of  interest  is  not 
paid  when  due  and  the  default  continues  for  some  specified 
length  of  time,  the  principal  of  the  bond  is  thereby  matured 
and  must  be  paid. 

In  event  of  default  either  on  principal  or  interest,  it  is 
usually  provided  that  foreclosure  may  follow,  or  perhaps,  pre- 
liminary thereto  or  in  lieu  thereof,  the  trustee  is  authorized  to 


BONDS  437 

take  possession  of  the  mortgaged  property  and  operate  it  for 
the  benefit  of  the  bondholders. 

When  bonds  are  redeemed  in  accordance  with  the  terms 
of  the  deed  of  trust,  they  are  cancelled  and  cannot  be  reissued 
unless  expressly  so  provided  in  the  deed  of  trust.  A  corpora- 
tion might,  however,  purchase  its  bonds  in  the  open  market 
and  sell  them  again  later. 

In  some  cases  provision  is  made  in  the  deed  of  trust  for 
redemption  of  bonds  prior  to  the  maturing  date.  Also,  con- 
vertible bonds  are  at  times  issued  which,  if  the  holder  elects, 
may  be  redeemed  in  stock  of  the  corporation.  Also  at  times 
it  is  provided  that  as  the  sinking  fund  accumulates,  the  funds 
may  be  used  from  time  to  time  to  redeem  the  outstanding 
bonds. 

§  397.     Investment  Value  of  Bonds 

If  bonds  are  purchased  at  par,  the  return  on  the  invest- 
ment is  the  exact  interest  paid  on  the  bond.  If,  however, 
bonds  are  purchased  either  above  or  below  par,  the  determina- 
tion of  the  actual  return  on  the  money  invested  becomes  some- 
what difficult. 

Thus,  if  a  $1,000  bond  due  in  ten  years  and  bearing  inter- 
est at  the  rate  of  5  per  cent,  is  purchased  at  $900,  it  is  obvious 
that  the  direct  interest  on  the  investment  is  considerably  in 
excess  of  5  per  cent,  amounting  to  5  5/9  per  cent.  In 
addition  to  this,  when  the  bond  is  paid  at  maturity,  its  full 
face  value  of  $1,000  is  received,  giving  a  further  return  or 
profit  of  $100  on  the  original  investment. 

On  the  other  hand,  if  the  bond  is  purchased  at  a  premium, 
say  at  $1,100,  the  direct  interest  returns  are  but  4  6/1 1  per 
cent,  and  on  maturity  of  the  bond  the  purchaser  receives  but 
$1,000  which  is  $100  less  than  the  price  he  paid  for  his  bond. 
There  is  therefore  a  double  loss — both  on  interest  and 
principal. 


438  THE   CORPORATE   FINANCES 

A  rough  approximation  of  the  returns  on  the  investment 
when  bonds  are  purchased  at  a  discount  or  at  a  premium, 
may  easily  be  made,  but  if  exact  results  are  to  be  reached — 
which  are  required  when  large  investments  are  to  be  made — 
the  calculations  are  laborious.  For  use  in  such  cases  bond 
tables  may  be  purchased  from  which  the  actual  investment 
value  of  any  ordinary  bond,  whether  sold  at  a  discount  or  at  a 
premium,  may  be  found  at  any  period  of  its  life. 

§  398.     Kinds  of  Bonds 

Many  classes  of  bonds  are  issued  under  varying  designa- 
tions, usually  derived  from  the  more  important  or  distinctive 
features  of  the  particular  issue.  The  bonds  most  frequently 
issued  are  briefly  discussed  in  the  present  section. 

Bonds  frequently  possess  the  characteristics  of  several  dif- 
ferent classes.  Thus,  the  bonds  of  the  United  States  Steel 
Corporation,  known  as  "ten-sixty-year  five  per  cent  sinking 
fund  gold  bonds,"  are  redeemable  at  any  time  after  ten  years 
from  date  of  issue  at  no  per  cent  of  their  face  value.*  Their 
payment  is  provided  for  by  a  sinking  fund,  and  they  are 
payable  in  gold  coin.  Also,  if  not  previously  redeemed,  they 
must  be  paid  at  the  end  of  sixty  years  and  bear  5  per  cent 
annual  interest.     All  this  is  indicated  by  the  name. 

I.  First  Mortgage,  etc.,  Bonds.  A  real  first  mortgage  or 
prior  lien  bond  is  one  secured  on  property  upon  which  no 
other  bonds  or  similar  obligations  are  secured.  (See  §  384.) 
Usually  a  first  mortgage  bond  is  a  first  lien  on  the  property  by 
which  it  is  secured,  though  this  is  not  invariably  the  case,  as 
for  instance,  a  builder's  lien  upon  property  covered  by  the  deed 
of  trust  takes  precedence  over  the  bonds. 

A  number  of  bonds  may  be  secured  by  the  same  property. 
In  such  case,  the  first  issue  is,  as  stated,  a  first  mortgage  bond 
or  prior  lien;  the  next,  a  second  mortgage  bond;  the  next,  a 


*  This  redemption  at   no  is   now   generally   understood   to  be   obligatory,   whether 
intentional  or  an  error  in  drafting  the  mortgage  by  which  the  bonds  are  secured. 


BONDS  439 

third  mortgage  bond,  etc.,  the  Hen  of  each  of  these  latter  being 
inferior  to  that  of  the  bond  or  bonds  which  precede  it,  but 
superior  to  that  of  the  bond  or  bonds  which  follow. 

As  a  matter  of  practice,  however,  bonds  are  rarely  issued 
under  the  term  of  second  mortgage,  third  mortgage,  etc.  A 
more  euphemistic  term  is  usually  chosen,  as  general  mortgage, 
refunding  mortgage,  consolidated  mortgage,  etc.  The  par- 
ticular description  used  has  no  significance,  as  in  some  cases  a 
general  mortgage  precedes  a  refunding  mortgage  and  in  other 
cases  the  reverse  is  true. 

2.  Junior  Lien,  etc.,  Bonds.  A  junior  lien  bond  is  one 
which  comes  after  or  is  inferior  to  some  other  bond  or 
bonds  in  its  lien  upon  the  property  by  which  it  is  secured. 
Thus  the  lien  of  a  second  mortgage  bond  is  a  junior  lien  to 
that  of  the  first  mortgage  bond. 

When  several  different  issues  of  bonds  are  secured  by  the 
same  property,  those  having  the  superior  lien  are  sometimes 
styled  underlying  bonds,  the  term  indicating  that  they  are 
closer  to  the  property  and  have  a  superior  claim.  Thus,  if 
first  and  second  mortgage  bonds  are  secured  on  the  same 
property,  the  first  mortgage  bonds  are  underlying  bonds.  If 
third  mortgage  bonds  are  also  issued,  both  first  and  second 
mortgage  bonds  are  underlying  bonds. 

3.  Gold,  etc..  Bonds.  A  bond  may  in  express  terms 
provide  for  payment  in  gold,  silver,  legal  tender  money,  etc. 
Such  provisions  are  legal  and  enforceable.  If  no  medium  is 
specified  in  which  payment  of  a  bond  must  be  made,  legal 
tender  is  always  understood. 

4.  Convertible  Bonds.  A  convertible  bond  is  one  which 
under  prescribed  conditions  carries  the  right  of  conversion 
into  other  securities  of  the  same  corporation.  The  usual 
form  of  convertible  bond  is  that  which  may  be  exchanged  for 
common  or  preferred  stock  of  the  issuing  corporation  at  a 
fixed  rate  of  exchange  and  within  a  certain  period. 


440  THE    CORPORATE    FINANCES 

It  is  obvious  that  the  conversion  privilege  gives  a  bond  a 
speculative  character  which  adds  greatly  to  its  attractiveness 
as  an  investment.  If  the  stock  of  the  issuing  company  ad- 
vances materially,  the  exchange  can  be  made  at  a  profit.  If 
the  stock  does  not  advance,  the  bonds  themselves  are  still  a 
good  investment.  In  short,  the  plan  combines  the  safety  of 
a  bond  investment  with  the  profit  possibilities  of  an  invest- 
ment in  stock;  but  it  must  be  borne  in  mind  that  the  conver- 
sion privilege  is  usually  given  to  a  junior  lien  bond,  the  con- 
version privilege  being  intended  to  offset,  in  part  at  least,  the 
bond's  inferior  lien. 

5.  Income  Bonds.  Income  bonds — to  which  some  prefix 
is  frequently  added — usually  come  into  existence  as  a  result 
of  a  reorganization  where  holders  of  bonds  bearing  a  fixed 
rate  of  interest  accept  in  exchange  a  bond  whose  interest  is 
contingent  on  earnings.  Income  bonds  vary  in  their  nature 
materially.  Usually  they  are  an  absolute  junior  mortgage  on 
the  property,  but  rarely  a  first  lien,  and  occasionally  they  are 
mere  debentures.  Some  carry  cumulative  interest,  others  do 
not.  The  security  of  the  latter  is  precarious  unless  secured 
by  an  instrument  that  clearly  defines  just  what  is  to  be  con- 
strued as  net  income  applicable  to  interest  payment.  In  gen- 
eral, the  use  of  such  bonds  is  unfortunate  and  the  credit  of  the 
issuing  company  lower  than  if  preferred  stock  were  used. 

As  a  rule,  income  bonds  carry  no  voting  power  and  the 
bondholders  having  acquired  their  security  in  exchange  for  an 
interest-bearing  bond  feel  themselves  in  the  position  of  cred- 
itors eager  for  their  interest  regardless  of  the  advisability  of 
payment  from  the  company's  standpoint,  and  the  latter  is 
equally  eager  to  delay  payment  of  interest  until  the  general 
finances  of  the  company  are  in  good  shape.  Not  infrequently 
the  whole  matter  ends  in  court  if  the  bondholders  can  find 
legal  ground  upon  which  to  bring  an  action.  The  use  of 
preferred  stock  would  be  better  for  all  concerned,  but  bond- 


BONDS  441 

holders  will  accept  an  income  bond  in  a  reorganization  where 
they  refuse  preferred  stock,  hence  the  use  of  the  bond. 

6.  Collateral  Trust  Bonds.  A  collateral  trust  bond  is 
one  which  is  secured  by  collateral — usually  stocks  and  bonds 
of  other  corporations  owned  by  the  issuing  corporation.  These 
are  deposited  with  a  trustee  under  an  agreement  setting  forth 
the  conditions  of  the  trust.     (See  §  383.) 

7.  Guaranteed  Bonds.  A  guaranteed  bond  is  one  the 
payment  of  which,  either  as  to  interest  or  principal  or  both, 
has  been  guaranteed  by  some  other  corporation.  Such  a 
guarantee  must  be  in  writing  and  must  either  be  written  on  the 
instrument  itself  or  be  attached  to  it  to  be  effective. 

Under  proper  conditions  such  guaranteed  bonds  are  legal 
and  are  frequently  issued.  Thus,  the  bonds  of  a  subsidiary 
road  may  be  guaranteed  by  the  parent  road,  or  a  bond  of  a 
component  corporation  may  be  guaranteed  by  the  holding  com- 
pany or  trust  of  which  it  forms  a  part.  Guarantees  are  of 
doubtful  value  in  most  cases  and,  when  trouble  comes  upon  a 
property,  the  bondholders  usually  have  to  look  to  their  real 
security  rather  than  the  guarantor. 

8.  Terminal,  etc.,  Bonds.  Terminal  bonds  are  those 
issued  by  and  secured  on  the  property  of  a  terminal  company 
which  is  usually  subsidiary  to  the  railroad  or  steamship  line 
using  the  terminal.  Such  bonds  are  usually  issued  for  termi- 
nal purchases  or  improvements.  Extension  bonds  are  those 
issued  by  a  railroad  to  extend  its  lines.  Equipment  bonds  are 
those  issued  for  equipment,  usually  by  a  railroad  company, 
though  they  might  be  issued  in  connection  with  an  industrial 
corporation.  Construction  bonds,  as  their  name  indicates,  are 
those  issued  to  secure  money  for  the  purposes  of  construction. 

9.  Car  Trust  Bonds.  Car  trust  or  equipment  trust  bonds 
or  certificates  are  issued  by  a  trustee  who  holds  for  their 
security  equipment  purchased  or  leased  by  a  railroad  company. 
The  money  realized  from  the  sale  of  these  bonds  goes  to   the 


442 


THE    CORPORATE    FINANCES 


manufacturers  or  vendors  of  the  equipment,  or  the  bonds  may 
be  turned  over  to  them  direct.  The  railroad  company  receives 
its  equipment,  subject  to  the  trust  agreement,  and  retires  the 
equipment  bonds  in  such  amounts  and  at  such  periods  as  are 
fixed  by  the  trust  agreement.  The  title  to  the  equipment  does 
not  usually  vest  in  the  railroad  company  until  all  the  bonds  are 
redeemed. 

Bonds  and  notes  of  this  character  are  usually  issued  in 
series  and  are  redeemable  in  their  serial  order  as  payments 
are  made  by  the  railroad  company.  When  the  final  payment 
is  made  by  the  railroad  company,  the  deed  of  trust  by  which 
the  property  is  held  is  released  and  the  equipment  becomes  the 
property  of  the  purchasing  company. 

lo.  Purchase  Money  Bonds.  Purchase  money  bonds  are 
those  given  to  secure  money  for  the  purchase  of  the  property 
by  which  they  are  secured. 

§  399.     Short-Term  Notes 

A  short-term  note  is  merely  a  corporation's  promissory 
note.  (See  Forms  163-166. )  It  may  be  secured  or  unsecured. 
If  secured,  it  is  usually  by  the  deposit  of  collateral  with  a 
trustee  under  a  trust  agreement.  The  larger  issues  are  gener- 
ally in  coupon  form  and  differ  but  little  from  the  usual  bond, 
except  in  their  early  maturity. 

Short-term  notes  are  issued  when  the  existing  conditions 
are  unfavorable  for  a  long-time  loan,  and  usually  carry  either 
a  larger  rate  of  interest  than  a  bond  issue  or  are  sold  at  a  dis- 
count that  produces  the  same  practical  result.  Short-term 
notes  are  usually  floated  with  the  expectation  that  they  will 
either  be  retired  at  maturity  or  will  be  taken  up  by  a  bond  issue 
on  more  favorable  terms  than  would  have  been  possible  at 
the  time  the  notes  were  issued. 


BOOK  IV 
SPECIAL  CORPORATE  TOPICS 


Part  XII — Corporate  Arrangements 


CHAPTER   LII 

VOTING  TRUSTS 

§  400.     General 

It  is  frequently  necessary  or  important  that  the  agreed 
management  of  a  corporation  be  preserved  consecutively  for 
a  term  of  years.  This  may  be  for  the  protection  of  minority 
or  special  interests,  or  to  maintain  a  control  satisfactory  to 
the  majority  as  then  existing,  or  in  pursuance  of  organization 
agreements,  or  in  accordance  with  the  terms  of  a  reorgan- 
ization or  consolidation.  In  any  such  case  the  voting  trust — 
sometimes  called  a  "stock  pool" — is  the  usual  means  by  which 
this  is  secured. 

The  voting  trust  is  an  arrangement  under  which  suffi- 
cient stock  to  insure  the  desired  ends  is  placed  in  the  hands 
of  trustees  for  some  certain  period  of  time  with  definite  in- 
structions as  to  the  way  in  which  this  stock  shall  be  voted. 
Other  features  may  enter  in,  as  provisions  to  prevent  the 
alienation  of  the  stock  held  by  these  trustees,  and  for  special 
dispositions  of  the  dividends  thereon,  etc.,  but  these  are  in- 
considerable and  the  designated  exercise  of  the  voting  power 
of  the  trusteed  stock  for  the  given  period  is  the  main  end 
sought.^     (See  Chapter  LII,  "Voting  Trust  Forms.") 

It  is  to  be  noted  that  the  objects  attained  by  the  voting 
trust  can  be  secured  more  permanently  by  the  formation  of 
a  "holding  corporation,"  where  this  is  permissible.  (See 
Chapter  LIII,  "Holding  Corporations.") 

^See   Knickerbocker   Inv.    Co.   v.    Voorhees,    100   App.    Div.    (N.    Y.)   414   (1905). 

445 


446  CORPORATE  ARRANGEMENTS 

§  401.     Distinctions 

The  voting  trust  as  here  considered  applies  only  to  the 
stock  of  a  single  corporation  and  must  be  distingushed  from 
the  voting  trust  arrangement  under  which  attempts  were 
formerly  made  to  combine  a  number  of  corporations  under 
one  management.  That  system  was  legally  unsound  and  has 
been  abandoned.  Neither  has  a  voting  trust  any  necessary 
connection  with  restrictions  on  the  sale  of  stock.  Provisions 
restricting  the  sale  of  stock  for  a  specified  period  or  to  anyone 
not  embraced  in  the  agreement  may  be  included,  but  the 
voting  restrictions  are  the  main  end  of  the  trust  and  these 
others  are  merely  incidental. 

§  402.     How  Formed 

A  voting  trust  is,  formed  by  placing  in  the  hands  of 
trustees  such  proportion  of  the  stock  of  the  particular  cor- 
poration as  may  be  necessary  to  secure  the  desired  control. 
These  trustees  act  under,  and  their  powers  are  defined  by,  an 
agreement,  styled  the  voting  trust  agreement,  subscribed  to 
by  all  the  parties  entering  the  trust.  (See  Form  27.)  This 
agreement  specifies  the  length  of  time  for  which  the  stock  is 
to  be  held  and  the  manner  in  which  it  is  to  be  voted  at  the 
annual  election  of  directors.  If  the  management  then  in 
power  is  to  be  retained,  the  trustees  would  be  instructed  to 
cast  the  vote  of  the  trusteed  stock  in  all  elections  of  directors 
for  the  parties  then  constituting  the  board,  suitable  provision 
being  made  in  case  of  the  possible  death  of  any  of  the  directors 
named.  If  the  object  of  the  trust  were  to  insure  minority 
representation  on  the  board,  the  trustees  would  be  instructed 
to  cast  the  trustee  vote  for  directors  in  favor  of  parties  named 
by  the  designated  minority  interests  up  to  a  specified  number, 
the  other  members  of  the  board  being  named  by  the  majority 
interests.  Or  if  the  object  of  the  trust  were  to  secure  an  effi- 
cient and  non-partisan  board,  the  trustees  might  be  instructed 


VOTING  TRUSTS 


447 


merely  to  cast  the  vote  of  the  stock  held  by  them  for  such 
persons  as  in  their  judgment  would  be  suitable  and  acceptable 
to  the  interests  involved.  The  trust  agreement  might  also 
provide  the  manner  in  which  the  trustees'  stock  is  to  be  voted 
in  matters  of  general  interest,  or  it  might  be  forbidden  to  vote 
on  these  matters,  or  its  vote  under  such  circumstances  might 
be  left  to  the  discretion  of  the  trustees. 

Whatever  the  instructions,  the  stock  must  be  voted  as  a 
unit  by  the  trustees,  in  accordance  therewith,  and,  provided 
the  conditions  of  the  trust  be  proper,  in  any  case  of  refusal 
so  to  vote,  the  courts  will  enforce  compliance. 

The  stock  included  in  a  voting  trust  is  actually  transferred 
to  the  trustees  and  is  by  them  taken  out  in  their  own  names. 
Trustees'  receipts  are  given  to  the  parties  depositing  stock, 
these  receipts  being  negotiable  in  form  and  representing  the 
equitable  ownership  of  the  stock  held  in  the  trust. 

The  trustees  are  authorized  to  collect  and  receive  any  divi- 
dends and  profits  accruing  on  the  stock  held  by  them,  but  must 
pay  over  the  same  in  due  proportion  to  the  equitable  owners 
of  the  trusteed  stock.  Often  the  trustees,  for  purposes  of  con- 
venience, direct  the  corporation  to  pay  the  dividends  to  the 
holders  of  the  trust  certificates. 

The  trust  agreement  also  provides  the  method  of  dissolu- 
tion of  the  trust  upon  the  expiration  of  the  specified  time  limit, 
and  any  other  desired  features  or  details.  In  order  to  avoid 
any  possibly  illegal  suspension  of  the  rights  of  alienation  in 
the  stock  held  in  trust,  the  agreement  may  provide  that  at 
any  time,  by  consent  of  all  the  parties  in  interest,  the  trust  may 
be  terminated.^ 

When  it  is  desired  to  control  but  a  single  election,  the  use 
of  proxies  is  the  most  convenient  method  by  which  this  may  be 
accomplished.  These,  being  revocable  and  of  limited  dura- 
tion, are  not  available  for  more  permanent  purposes. 

'  Willijiins  V.   Montgomery,  148  N.  Y.  519  (1856). 


448 


CORPORATE   ARRANGEMENTS 


§  403.    Legal  Status 

New  York  and  Maryland  are  the  only  states  in  the  Union 
in  which  the  voting  trust  is  expressly  sanctioned  by  statute. 
In  New  York  this  was  done  in  1901,  when  an  amendment  to 
the  General  Corporation  Law  was  passed,  providing: 

"A  stockholder  may  by  agreement  in  writing,  transfer 
his  stock  to  any  person  or  persons  for  the  purpose  of  vesting 
in  him,  or  them  the  right  to  vote  thereon  for  a  time  not 
exceeding  five  years  upon  terms  and  conditions  stated,  pur- 
suant to  which  such  person  or  persons  shall  act;  every  other 
stockholder,  upon  his  request  therefor,  may,  by  a  like  agree- 
ment in  writing,  also  transfer  his  stock  to  the  same  person  or 
persons  and  thereupon  may  participate  in  the  terms,  condi- 
tions and  privileges  of  such  agreement;  the  certificates  of 
stock  so  transferred  shall  be  surrendered  and  canceled  and 
certificates  therefor  issued  to  such  transferee  or  transferees 

The  Maryland  statute  was  passed  in  1908  and  follows  the 
New  York  statute/ 

Under  these  statutes  a  duplicate  of  the  voting  trust  agree- 
ment must  be  kept  on  file  in  the  principal  business  office  of  the 
corporation,  open  to  the  inspection  of  any  stockholder  during 
business  hours. 

Prior  to  the  passage  of  the  statute,  voting  trusts  existed 
in  New  York  and  were  regarded  favorably  by  the  courts. 
Since  its  passage,  the  conditions  prescribed  by  the  statute 
would  probably  have  to  be  followed  in  detail  to  establish  an 
enforceable  trust. 

In  New  Jersey,  Massachusetts,  California,  Alabama,  and 
other  states,^  although  no  statutes  on  this  subject  exist,  the 
courts  have  rendered  decisions  favoring  similar  arrangements 


3  Gen.   Corp.   Law   (N.   Y.),   §25. 

*  Md.   Code,  Art.   23,   §  102. 

'  Chapman  v.  Bates,  61  N.  T.  Eq..  658  (i<goo) ;  Brightman  v.  Bates,  175  Mass., 
los  (1900);  Whitehead  v.  Sweet,  1^6  Gal.,  67  (1899);  Mobile,  etc.,  Co.  v.  Nicholas,  9(8 
Ala.  92  (1893);  Venner  v.  Chicago  City  Ry.  Co.,  25)8  111.  523.  (1913). 


VOTING  TRUSTS  449 

and  intimating  that  where  the  trust  was  for  a  proper  purpose 
and  for  a  reasonable  time,  and  did  not  contemplate  any  ad- 
vantage from  which  other  stockholders  of  the  same  corpora- 
tion were  excluded,  it  was  not  contrary  to  any  principles  of 
law  or  equity.  It  is  probable  that  a  voting  trust,  reasonable 
as  to  its  duration  and  equitable  as  to  its  purposes,  would  be 
sustained  in  any  state  of  the  Union. 

§  404.     Illegal  Voting  Trusts 

The  primary  requisite  of  a  legally  defensible  and  enforce- 
able voting  trust  is  an  object  not  illegal  in  itself,  or  calculated 
to  injure  or  discriminate  against  other  stockholders  of  the 
same  corporation.  The  voting  trust  must  also  be  reasonable 
as  to  its  duration  and  terms,  and  its  possible  advantages  should 
be  open  to  all  stockholders  of  the  particular  corporation. 

Any  voting  trust  formed  to  promote  a  monopoly,  or  to 
dominate  the  corporation  in  the  interests  of  another  corpora- 
tion, or  to  deprive  other  stockholders  of  any  of  their  rightful 
powers,  would  undoubtedly  be  held  illegal. 

§  405.     Restriction  of  Stock  Sales 

The  voting  trust  as  a  means  of  restricting  the  sales  of  the 
stock  held  under  its  provisions  is  of  doubtful  efficacy.  It  un- 
questionably prevents  the  transfer  of  the  actual  stock  during 
the  life  of  the  trust,  and  thereby  prevents  the  transfer  of  any 
of  the  stockholders'  rights  that  would  accompany  delivery  of 
the  stock.  On  the  other  hand,  the  trustees'  receipts,  or  certi- 
ficates, are  transferable,  and  if  the  object  of  restricting  the  sale 
is  to  maintain  the  market  price  of  the  stock,  or  to  give  prefer- 
ence to  the  sale  of  treasury  or  other  special  stock,  the  sale  of 
the  trustees'  certificates  might  interfere  with  these  purposes 
almost  as  effectually  as  would  the  sale  of  the  stock  itself. 


CHAPTER    LIII 
HOLDING  CORPORATIONS 

§  406.     General 

A  holding  corporation  in  the  modern  sense  of  the  term 
is  a  corporation  formed  for  the  express  purpose  of  controlling 
other  corporations  by  the  ownership  of  a  majority  of  their 
stock. 

"The  advantages  of  a  holding  corporation  may  be  enum- 
erated as  follows: 

"i.  It  furnishes  a  readily  available  and  effective  method 
of  controlling  several  corporations  for  a  common  object. 

"2.  It  may  be  employed  to  perpetuate  corporate  control. 
Financiers  holding  the  control  of  corporations  may  transfer 
their  shares  to  a  holding  corporation.  Death  or  disagree- 
ment will  not  then  affect  the  control.  In  many  cases  also  a 
holding  corporation  may  take  the  place  of  a  voting  trust,  which 
always  is  limited  as  to  time. 

"3.  The  holding  corporation  permits  the  capitalization  of 
controlling  stock  interests.  The  control  of  a  corporation  hav- 
ing a  capital  of  twenty  million  dollars — as  an  illustration — 
requires  a  permanent  investment  of  more  than  ten  million 
dollars,  assuming  the  stock  worth  par.  If  a  holding  corpora- 
tion is  formed  with  a  capital  equal  to  the  investment,  the 
shares  may  be  transferred  to  it  and  forty-nine  per  cent  of  its 
stock  sold:  The  original  controlling  stockholders,  by  retaining 
control  df  the  holding  corporation,  retain  control  of  the  orig- 
inal corporation."^ 


» Noyes  on  Intercorporate  Relations,  §  285, 


HOLDING   CORPORATIONS 


451 


Under  the  common  law,  which  did  not  permit  one  corpora- 
tion to  invest  in  the  stock  of  another,  holding  corporations 
were  impossible,  and  any  attempt  of  a  corporation  to  control 
another  corporation  by  holding  a  majority  of  its  stock  would 
have  been  held  ultra  vires. ^ 

^'But  as  the  powers  of  corporations,  created  by  legislative 
act,  are  limited  to  such  as  the  act  expressly  confers,  and  the 
enumeration  of  these  implies  the  exclusion  of  all  others,  it 
follows  that,  unless  express  permission  be  given  to  do  so,  it 
is  not  within  the  general  powers  of  a  corporation  to  purchase 
the  stock  of  other  corporations  for  the  purpose  of  controlling 
their  management."^ 

The  common  law  rule  has,  however,  been  gradually  re- 
laxed and  set  aside  until  now  the  purchase  of  stocks  by  a  cor- 
poration may  be  provided  for  in  most  states  of  the  Union. 

Corporations  have  certain  incidental  powers  of  acquiring 
and  holding  stock,  as  discussed  in  the  section  which  follows. 
The  general  right  to  purchase  and  hold  the  stock  of  other 
corporations,  under  which  the  holding  corporation  is  possible, 
is,  however,  derived  from  legislative  enactment,  either  by  vir- 
tue of  statutes  expressly  conferring  on  specific  corporations 
the  power  to  buy  and  hold  the  stocks  of  other  corporations, 
or,  in  a  few  states,  under  the  operation  of  statutes  permitting 
the  formation  of  corporations  for  any  legitimate  purpose.* 

§  407.     Incidental  Powers  to  Hold  Stock 

In  many  cases  corporations  have  power  to  take  and  hold 
stock  in  other  corporations  as  a  power  incidental  to  their  main 
purpose.  For  instance,  certain  corporations,  like  the  great 
insurance  companies  which  in  the  regular  course  of  business 
have  large  sums  for  investment,  are  very  properly  allowed  to 

2  Noyes  on  Tntercorporate  Relations,  §§264,  274;  People  v.  Pullman  Co.,  175  111. 
125,  (1898);  64  L.  R.  A.  366;  People  v.  Chicag-o  Trust  Co.,  130  111.  268  (1889);  Hyams 
V.   C.  &  H.   Mining  Co.,  221   Fed.  529,  5137  (19151)-  „  ,  „    , 

3  De  La  Vergne   Co.  v.    Savings   Institution,   175  U.    S.  40,  54  (1899)- 
*Dittman    v.    Distilling    Co.,    64    N.    J.    Eq.    537    (19031);    Market    St.    Ry.    Co.    v. 

Hellman,   109  Cal.   57H  (1895). 


452  CORPORATE  ARRANGEMENTS 

invest  these  in  safe  stocks.  Also  in  almost  all  cases  corpora- 
tions are  allowed  to  take  corporate  stock  to  save  a  debt.  They 
may  also  take  stock  as  collateral  to  secure  an  obligation, 
which  in  the  usual  course  of  business  may  bring  about  their 
ownership  of  such  collateral. 

Where  a  corporation  may  lawfully  consolidate  with  an- 
other corporation,  it  may  acquire  the  stock  of  this  other  cor- 
poration as  a  proper  step  to  such  consolidation.  Also  in 
some  cases  it  has  been  held  that  a  corporation  may  take  stock 
in  another  corporation  when  this  other  corporation  will  pro- 
mote some  of  its  specified  purposes,  as  when  a  street  car  com- 
pany takes  stock  in  a  hotel  or  amusement  park  on  or  near  its 
lines,  or  a  manufacturing  company  takes  stock  in  a  power 
development  company  from  which  it  will  obtain  power. 

§  408.     Authorization  to  Hold  Stock 

New  Jersey  was  the  first  state  to  enact  statutes  specifi- 
cally empowering  corporations  organized  under  its  laws  to 
hold  the  stock  of  other  corporations.  This  law  was  adopted 
in  the  year  1888,  and  reads  as  follows: 

"Any  corporation  may  purchase,  hold,  sell,  assign,  trans- 
fer, mortgage,  pledge  or  otherwise  dispose  of  the  shares  of  the 
capital  stock  of,  or  any  bond,  securities,  or  evidences  of  indebt- 
edness created  by  any  other  corporation  or  corporations  of 
this  or  any  other  state,  and  while  owner  of  such  stock  may 
exercise  all  the  rights,  powers  and  privileges  of  ownership, 
including  the  right  to  vote  thereon."^ 

The  enactment  of  this  law  by  New  Jersey  paved  the  way 
for  the  great  industrial  combinations.  Theretofore  they  had 
been  attempted  by  the  appointment  of  a  board  of  trustees  in 
whose  hands  was  placed  a  majority  of  the  stock  of  the  cor- 
poration to  be  controlled,  these  trustees  then  electing  boards 
of  directors  who  managed  their  respective  corporations  in 


'^  See  Gen.   Corp.   Law  of  New  Jersey,   §  51. 


HOLDING   CORPORATIONS 


453 


the  common  interest.  This  arrangement  was  declared  illegal 
and  was  abandoned  for  the  holding  corporation  under  the 
New  Jersey  law.^  Recent  federal  decisions  declaring  certain 
of  these  holding  corporations  illegal  are  not  directed  against 
the  laws  under  which  they  were  formed,  but  against  the  pur- 
poses of  the  corporations.     (See  §  411.) 

Later  statutes  in  New  Jersey  have  limited  the  broad  powers 
given  in  1888.  Under  the  present  law  the  purchase  by  a 
corporation  of  the  stock  or  securities  of  another  corporation 
is  limited  to  a  purchase  "solely  for  investment,  and  not  using 
the  same  by  voting  or  otherwise  to  restrain  trade  or  to  bring 
about,  or  in  attempting  to  bring  about,  the  substantial  lessen- 
ing of  competition."  The  statute  insures  to  corporations  the 
usual  incidental  powers  to  hold  stock  of  other  corporations/ 

Delaware  and  Maine  have  enacted  statutes  similar  to  the 
earlier  statute  of  New  Jersey  giving  corporations  the  unlimited 
power  to  buy,  hold,  and  sell  stocks,  and  in  New  York  these 
privileges  may  be  enjoyed  if  so  provided  in  the  charter.  Un- 
der the  Maine  statute  it  has  been  held  that  a  corporation 
organized  under  the  law  regulating  the  incorporation  of  gen- 
eral business  corporations,  could  not  acquire  stock  in  com- 
panies organized  to  do  insurance  business,  thus  doing  in- 
directly what  it  could  not  do  directly.* 

§  409.     What  Holdings  Carry  Control 

Contrary  to  popular  opinion  it  is  rarely  necessary  to  hold 
51  per  cent  of  the  outstanding  stock  of  a  corporation  in  order 
to  elect  a  majority  of  the  directors,  and  through  them  to  elect 
the  officers  and  control  the  corporation.  Where  all  the  stock 
is  held  in  a  few  hands,  as  in  a  close  corporation,  the  case  is 
different,  but  even  here  anyone  holding  or  controlling  half 


estate   v.    Standard    Oil    Co.,    49    Ohio    St.    137    (1892);    People   v.    North    River 
Sugar  Refining  Co.,  121  N.  Y.  582  (1890). 
'N.   J.    L.    1915,    Ch.    114. 
•  Central  Life  Securities  Co.  v.   Smith,  22^  Fed.   170  (1916). 


454 


CORPORATE   ARRANGEMENTS 


the  stock  can,  if  he  once  obtains  a  majority  of  the  board,  hold 
his  control  indefinitely.  A  majority  against  him  cannot  be 
obtained,  and  if  a  deadlock  should  arise  over  the  election  of 
directors,  no  new  directors  could  be  elected  without  his  con- 
sent, and  his  directors,  already  in  office,  would  hold  over  until 
some  agreement  satisfactory  to  him  was  reached. 

With  the  usual  corporation  with  scattered  holdings,  a 
much  smaller  proportion  than  half  the  stock  is  sufficient  to 
control.  In  an  action  under  the  Sherman  Anti-Trust  Act, 
the  Supreme  Court  held  that  the  purchase  of  46  per  cent  of 
the  stock  of  a  competing  railroad  was  ample  to  control  its 
operations,  thereby  effecting  a  combination  in  restraint  of 
trade.' 

"The  president  of  one  of  the  largest  railroad  systems 
in  the  United  States  is  authority  for  the  statement  that  33 
per  cent  of  the  stock  which  has  voting  power  is  sufficient  to 
control  any  important  railway,  always  excepting  instances 
where  great  blocks  of  stock  are  centralized  in  a  few  hands. 
He  added  that  those  in  control  of  a  property  could  always 
count  upon  a  large  proportion  of  the  stockholders  supporting 
them  as  a  matter  of  course,  because  such  holders  were  too 
weak  or  too  lazy  to  engage  in  any  independent  movement  of 
their  own. 

"In  the  case  of  banks  and  trust  companies,  33  per  cent 
holdings  are  nearly  always  sufficient  to  protect  an  existing 
management.  That  is  the  basis  usually  followed  by  new 
interests  in  attempting  to  buy  up  properties,  and  with  the  trust 
companies  especially  such  holdings  have  almost  invariably 
been  sufficient  to  force  recognition  from  an  unwilling  man- 
agement. One  bank  president  of  this  city  has  been  known 
to  own  personally  40  per  cent  of  the  stock  of  his  own  bank, 
which  was  unusually  heavily  capitalized.  With  such  holdings 
and  those  of  his  friends,  the  present  owners  could  not  pos- 


» United  States  v.  Union  Pac.   R.  R.  Co.,  226  U.  S.  61,  96  (191a). 


HOLDING   CORPORATIONS 


455 


sibly  be  dislodged.  The  president  of  another  bank,  following 
a  different  method,  has  taken  care  to  see  that  its  stock  is  dis- 
tributed as  widely  as  possible,  so  that  today,  with  a  compar- 
atively small  capitalization,  the  bank  is  owned  by  at  least  two 
thousand  different  stockholders,  who  could  hardly  be  com- 
bined against  the  management. "^^ 

It  is  reported  that  when  the  control  of  the  Western  Union 
Telegraph  Company  passed  to  the  Bell  Telephone  interests, 
it  was  accomplished  by  the  transfer  of  but  20  per  cent  of  the 
outstanding  stock. 

§  410.     Its  Function  In  Industrial  Combination 

At  one  time  the  holding  corporation  occupied  a  position 
of  great  importance,  being  the  means  by  which  many  of  the 
great  industrial  combinations  were  effected  and  controlled. 
Sometimes  these  corporations  were  confined  strictly  to  the 
function  of  holding  companies,  as  was  the  case  with  the  North- 
ern Securities  Company  which  was  formed  for  the  sole  purpose 
of  holding  sufficient  stock  of  the  Great  Northern  Railway 
Company  and  the  Northern  Pacific  Railway  Company  to  con- 
trol the  two  corporations  and  combine  their  interests.  Usually, 
however,  such  a  corporation  was  given,  in  addition,  ample 
powers  to  carry  on  directly  any  business  or  industry  in  the 
line  of  the  proposed  combination.  Then  it  could  operate  by 
controlling  the  majority  of  the  stock  of  its  component  cor- 
porations, or  by  buying  up  the  manufacturing  plants  engaged 
in  the  particular  industry,  or  by  initiating  new  industrial 
operations  on  its  own  account,  or  by  doing  all  of  these  things. 

As  already  suggested,  the  holding  corporation  itself  could 
be  controlled  by  the  ownership  of  but  50  or  51  per  cent  of  its 
stock,  and  so  long  as  the  parties  in  control  hold  this  amount, 
they  could  part  with  any  additional  stock  without  interfering 


10  Editorial  New  York  Evening  Post. 


456  CORPORATE  ARRANGEMENTS 

with  their  control  of  the  holding  corporation  and  through  it 
of  the  subsidiary  corporations.  This  device  made  it  possible 
for  those  who  were  on  the  inside  to  control  much  capital  with 
a  comparatively  small  investment  on  their  own  part.^^ 

§411.     Limitations  on  Use  of  Holding  Companies 

The  holding  corporation  is  the  instrument  by  which  most 
of  the  great  industrial  combinations  have  been  effected,  and 
has  been  generally  recognized  as  the  proper  legal  means  to 
this  end.  Most  of  the  great  industrial  combinations  and  many 
of  the  smaller  ones  have,  however,  come  to  grief  through  the 
enforcement  of  the  Sherman  Anti-Trust  Law. 

At  the  present  time  a  holding  company  organized  in 
one  state  may  control  corporations  organized  under  the  laws 
of  other  states. ^^  It  is  within  the  power  of  any  state  objecting 
to  this,  to  pass  laws  to  prevent  foreign  holding  corporations 
from  controlling  corporations  formed  under  the  laws  of  such 
states.  With  a  view  to  simplifying  corporate  relations,  it  is 
probable  that  such  action  on  the  part  of  the  states  would  be 
of  advantage.  The  same  end  might  be  achieved  by  means  of 
a  statute  denying  the  right  to  vote  at  corporate  elections  to  all 
stock  except  that  owned  by  natural  persons  in  their  own 
right.  This  would  effectually  prevent  the  operation  of  the 
holding  corporation. 

In  the  Northern  Securities  case,  the  United  States 
courts  held  the  attempt  to  prevent  competition  between  two 
opposing  interstate  railways  by  means  of  a  holding  corpora- 
tion illegal.^'  In  the  famous  cases  against  the  Standard  Oil 
Company  and  the  American  Tobacco  Company  the  Supreme 
Court  put  a  final  quietus  on  the  use  of  holding  companies  as 


11  See  I   Cook  on  Corp.,   §317;   Noyes  on  Intercorporate   Relations,   §285  et  seq.; 
Robotham  v.  Prudential  Insurance  Co.,  64  N.  J.  Eq.  673  (1903). 

12  Island   Heights,   etc.,    Co.    v.    Brooks  &   Brooks,  88  N.   J.   L.  613   (1916) ;   contra. 
Central  L.    S.    Co.   v.    Smith,  236  Fed.    170,   176  (1916). 

"See  Northern  Securities  Co.   v.   United  States,   193  U.   S.   197  (1904). 


HOLDING   CORPORATIONS 


457 


a  means  of  controlling  competing  companies  where  such  con- 
trol resulted  in  a  violation  of  the  Sherman  Anti-Trust  Law." 

The  Clayton  Act  of  October  15,  19 14,  makes  the  law 
very  specific  as  to  corporations  engaged  in  interstate  com- 
merce, and  forbids  the  acquisition  by  one  corporation  of  the 
whole  or  any  part  of  the  stock  of  another  corporation, 
"where  the  effect  may  be  to  substantially  lessen  competition 
between  the  corporation  whose  stock  is  so  acquired  and  the 
corporation  making  the  acquisition,  or  to  restrain  such  com- 
merce in  any  section  or  community,  or  tend  to  create  a 
monopoly  of  any  line  of  commerce." 

In  a  remarkable  case  in  New  Jersey,^^  minority  stock- 
holders sought  to  enjoin  the  directors  of  the  Prudential  Life 
Insurance  Company  from  carrying  out  an  arrangement  by 
which  the  Fidelity  Trust  Company  was  to  control  the  Pru- 
dential Company  and  the  Prudential  Company  in  its  turn  was 
to  control  the  Fidelity  Trust  Company.  Under  this  plan  at 
the  next  ensuing  election,  which  was  that  of  the  Trust  Com- 
pany, the  Prudential  directors,  voting  a  majority  of  its  stock, 
would  have  put  themselves  in  charge  of  the  affairs  of  the 
Trust  Company.  Then  when  the  time  came  for  the  Pruden- 
tial election,  these  same  directors,  exercising  the  Trust  Com- 
pany control,  would  in  like  manner  have  put  themselves  in 
charge  of  its  affairs,  and  thereafter  the  interlocking  board 
thus  formed  would  have  been  self -perpetuating,  and  the  enor- 
mous assets  of  the  Prudential  Insurance  would  have  been 
controlled  by  the  board  in  perpetuity. 

In  the  course  of  his  argument  counsel  for  the  directors 
asserted  that  under  the  laws  of  New  Jersey  the  following  plan 
would  be  entirely  legal: 

"One  man  controls  a  company  of  $10,000,000  capital.  He 
may  form  a  new  company  with  a  capital  of  $5,100,000  to 


1*  Standard  Oil  Co.  v.  United  States,  221  U.  S.   i   (191 1);  United  States  v.  Ameri- 
can Tobacco  Co.,  221  U.  S.   106  (1911). 

"  Robotham  v.  Prudential  Insurance  Co.,  64  N.  J.  Eq.  67^  {igcy^^ 


458  CORPORATE  ARRANGEMENTS 

hold  a  majority  of  the  stock.  He  may  then  sell  all  but  $2,- 
600,000  of  the  stock  in  company  No.  2  and  transfer  his 
remaining  stock  to  a  new  company  with  a  capital  of  $2,600,- 
000.  He  may  then  sell  to  company  No.  3  all  but  $1,400,000 
and  transfer  that  to  a  new  company.  This  process  may  go 
on  until  the  power  of  the  whole  chain  of  corporations  is  vested 
in  the  holder  of  a  few  thousand  dollars  of  stock  in  the  ultimate 
company,  and  the  same  chain  can  be  used  for  an  unlimited 
number  of  companies." 

Vice-Chancellor  Stevenson,  before  whom  the  case  was 
heard,  apparently  did  not  sympathize  with  this  view  of  the 
possibilities  of  holding  companies  under  the  New  Jersey  law, 
and  expressed  his  views  with  some  emphasis.  The  court  also 
granted  the  injunction  asked  for,  thereby  indicating  that  the 
mutual  control  of  each  other  by  two  corporations  is  not  under 
existing  laws  a  legal  possibility. 

In  any  case  of  abuse  of  power  by  means  of  a  holding  cor- 
poration, the  courts  would  undoubtedly  afford  relief. ^^ 

§  412.     Parent  Companies 

A  useful  variant  of  the  holding  company  is  frequently  em- 
ployed with  advantage  in  the  exploitation  of  inventions.  A 
parent  corporation,  in  which  the  patent  rights  for  such  inven- 
tions are  vested,  is  formed  in  some  selected  state  where  the 
power  to  hold  the  stock  of  other  corporations  may  be  had. 
Subordinate  companies  are  then  formed  in  the  several  states 
or  other  territorial  districts,  and  to  these  companies  rights  in 
the  invention  are  assigned  for  their  respective  districts,  the 
parent  company  usually  reserving  or  acquiring  a  controlling 
interest  in  each  subordinate  company.  The  patent  rights  may 
be  sold  to  the  sub-companies  absolutely,  or  with  reservation 
of  royalties,  or  perhaps  a  mere  license  may  be  issued.     The 


See   Farmers'   Loan   &  Trust   Co.   v.    N.   Y.,  etc.,   R.    Co.,   150  N.    Y.   410    (1896) 

V.   N.  Y.   C.   &  H.   R.   R.   Co.,  69  Api     -  --    - 

muUer  V.  Distilling  Co.,   114  Fed.  491   (1902; 


Niles  V.   N^  Y.   C.   &  H.   R.   R.   Co.,  69  App.'  Div.   (N.  Y.)   144  (1902);  contra    Wind- 

0' 


HOLDING   CORPORATIONS 


459 


subordinate  company  then  operates  in  its  own  territory  as  an 
independent  company  but  under  the  general  direction  of  the 
parent  company,  this  direction  becoming  immediate  and  abso- 
lute in  case  of  necessity. 

Under  this  plan  the  parent  corporation  makes  certain  the 
proper  fulfilment  of  its  contracts  with  the  subordinate  com- 
panies, and  also  insures  the  proper  and  harmonious  conduct 
of  the  general  business.^^ 


"For  a  discussion  of  this  subject  see  People  v.  Am.   Bell  Telephone  Co.,  117  N. 
Y.  241   (1889). 


CHAPTER   LIV 

CONCERNING  PROMOTERS 

§  413.    The  Promoter's  Function 

A  promoter,  as  considered  here,  is  one  who  actively  en- 
gages in  the  financing  and  organization  of  an  enterprise  under 
the  corporate  form.  The  term  is  described  by  an  English 
authority  as  a  "short  and  convenient  way  for  designating 
those  who  set  in  action  the  machinery  by  which  the  Act  enables 
them  to  create  a  corporation."  Cook  briefly  classifies  the  pro- 
moter as  a  "person  who  brings  about  the  incorporation  and 
organization  of  a  corporation."^ 

Another  idea  enters  into  the  modern  everyday  business 
use  of  the  term.  The  promoter's  activity  and  interest  in  the 
affairs  of  the  enterprise  are  incited  by  the  expectation  of 
special  profits.  If  he  does  not  realize  or  expect  to  realize 
special  profits  out  of  the  undertaking,  he  is  not,  in  modern 
parlance,  a  promoter,  though  filling  every  requirement  of  the 
legal  definition. 

In  the  organization  of  most  modern  corporations  the  pro- 
moter plays  an  active  and  very  important  part.  His  antici- 
pated special  profits  from  these  efforts  are  usually  large  and 
not  infrequently  excessive.  His  arrangements  whereby  these 
special  profits  are  to  be  secured  have  given  rise  to  a  class  of 
cases  turning  solely  upon  the  relations  existing  between  the 
promoter,  his 'associates,  and  the  corporation.  The  ideal  of 
the  law  in  regard  to  these  relations  is  high.     It  is  to  be  re- 


^3  Cook  on  Corp.,  §651;  Dickerman  v.  Northern  Trust  Co.,  176  U.  S.  181,  203, 
(1899);  Armstrong  v.  Sun  Printing,  etc.,  Assn.,  137  A.  D.  (N.  Y.)  830  (1910) ;  Arnold 
V.    Searing,    78  N.   J.    Eq.    146   (1910). 

460 


CONCERNING   PROMOTERS 


461 


gretted  that  the  methods  of  promoters  are  usually  on  a  much 
lower  level. 

§  414.     Promoter's  Relation  to  Corporation 

For  the  purposes  of  the  present  consideration  the  promoter 
is  one  who  concerns  himself  in  the  financing  and  organiza- 
tion of  a  corporation  with  a  view  of  realizing  special  profits. 
In  a  large  proportion  if  not  the  majority  of  such  cases,  the 
promoter  has  brought  about  the  organization  of  the  corpora- 
tion for  the  express  purpose  of  securing  these  special  profits. 
There  is  no  intrinsic  iniquity  or  injustice  in  so  doing.  The 
only  question  is  as  to  the  propriety  and  legality  of  his  ar- 
rangements for  their  collection.  Too  frequently  the  methods 
of  the  promoter  are  not  only  of  doubtful  moral  status,  but 
directly  in  conflict  with  the  established  law. 

The  relation  of  the  promoter  both  to  the  corporation  and 
to  those  associated  with  him  in  its  organization  is  one  of  trust. 
He  is  guiding  the  affairs  of  the  incipient  corporation  and  is 
supposed  to  be  safeguarding  its  interests  as  he  would  his  own. 

As  stat-ed  in  Old  Dominion  Copper  Co.  v.  Bigelow,  203 
Mass.  159,  187  (1909),  quoting  in  part  from  an  earlier  case: 
''Promoters  have  in  their  hands  the  creation  and  moulding  of 
the  company:  they  have  the  power  of  defining  how,  and 
when,  and  in  what  shape  and  under  what  supervision,  it  shall 
start  into  existence  and  begin  business.  The  corporation  is 
in  the  hands  of  the  promoter  like  clay  in  the  hands  of  the 
potter.  It  is  to  this  person,  absolutely  helpless  and  incapable 
of  independent  initiative  or  uncontrolled  action,  that  the 
promoter  stands  as  trustee." 

This  doctrine  is  too  clearly  established  to  be  questioned. 
The  confidential  relations  of  the  promoter  being  admitted,  it 
follows,  then,  that  while  he  may  with  entire  propriety  profit 
by  his  connection  with  the  corporation,  such  profit  must  be  of 
such  a  nature  as  is  compatible  with  confidential  relations. 


462  CORPORATE  ARRANGEMENTS 

§  415.     Illegal  Arrangements 

"Corporations  can  be  formed  through  irresponsible  agents 
with  ease.  If  these  agents  can  vote  away  a  substantial  part 
of  the  capital  stock  for  property  of  comparatively  small  value, 
and  still  with  immunity  to  themselves  and  their  principals 
receive  from  the  uninformed  public  cash  subscriptions  for  the 
rest  of  the  capital  stock,  the  organization  and  management  of 
corporations  might  readily  become  a  'system  of  frauds.'  "^ 

The  usual  mistake  of  the  promoter  is  in  dealing  with  the 
corporation  as  he  would  with  a  stranger.  Unreasonable  or 
even  large  profits  are  difficult  of  attainment  if  the  party  from 
whom  they  are  to  be  drawn  is  informed  as  to  the  facts,  and  for 
this  reason  the  promoter  wishing  to  sell  property  to  the  cor- 
poration usually  conceals  or,  worse  still,  misrepresents  its  real 
cost.  If  the  property  were  actually  owned  by  the  promoter 
and  had  been  so  owned  before  the  organization  of  the  corpo- 
ration was  undertaken,  the  promoter's  status  would  be  differ- 
ent. Then  there  would  ordinarily  be  no  compulsion  upon  him 
to  reveal  the  cost  of  the  property  and  he  might  sell  it  to 
the  corporation  at  any  agreed  price  and,  in  the  absence  of 
misrepresentation,  without  fear  of  legal  consequences. 

Usually,  however,  the  promoter  does  not  own  the  prop- 
erty taken  over  by  the  corporation,  but  either  holds  it  under 
option  or  is  acting  in  the  interests  of  the  real  owner,  who  pays 
him  a  percentage  of  the  price  secured,  or  allows  him  to  offer 
it  to  the  corporation  at  an  advanced  price,  protecting  the  pro- 
moter in  all  excess  over  the  real  price  to  the  owner.  When 
the  promoter  occupies  this  position,  he  is  in  conflict  with  the 
law,  for  it  has  been  laid  down  clearly  and  unmistakably  that 
a  promoter  must  not  make  any  secret  profit  out  of  his  cor- 
poration, or  out  of  those  associated  with  himself  in  the  forma- 
tion of  the  corporation. 

"It  is  well  settled  that  they  will  not  be  permitted  to  take 


'Old  Dom.  Copper  Co.  v.  Bigelow,  203  Mass.   159,   188  (1909). 


CONCERNING   PROMOTERS 


463 


advantage  of  their  position  in  order  to  make  a  secret  profit 
out  of  their  transactions  on  behalf  of  the  proposed  corporation 
or  of  the  corporators  or  out  of  their  deahngs  with  the  cor- 
poration or  corporators."  ^ 

The  leading  case  on  this  subject  is  that  of  Erlanger  v. 
New  Sombrero  Phosphate  Co.,  5  Ch.  Div.  73;  affirmed  in  3 
App.  Cases  1218  (1878).  This  is  an  English  case,  but  its 
doctrines  have  been  generally  followed  in  this  country.  Er- 
langer and  his  associates  formed  a  syndicate  to  purchase  an 
island  containing  phosphate  which  was  offered  to  them  for 
£55,000.  Through  agents  a  company  was  then  formed, 
Erlanger  naming  the  five  directors.  Of  these,  two  were  at 
the  time  out  of  the  country.  Of  the  three  remaining,  one  was 
Erlanger's  private  agent,  one  was  Lord  Mayor  of  London, 
and  the  third  was  a  Rear  Admiral  of  the  British  Navy.  These 
two  latter  were  not  interested  in  any  way  with  Erlanger  in 
the  sale  of  the  island  to  the  corporation,  were  not  informed 
as  to  the  circumstances  and  did  not  make  any  inquiry,  but, 
acting  with  the  Erlanger  director,  accepted  Erlanger's  propo- 
sition to  sell  the  island  to  the  corporation  for  £80,000  in  cash 
and  £30,000  in  shares.  Stock  in  the  corporation  was  then 
sold  until  some  400  shareholders  were  interested  in  the  com- 
pany. Later  these  secured  control  of  the  company,  and,  hav- 
ing discovered  the  facts  as  to  the  sale  of  the  island,  promptly 
brought  suit  against  all  parties  concerned  in  its  sale  to  the 
company.  As  a  result,  the  sale  was  ordered  rescinded  and  the 
vendors  were  ordered  to  return  the  price  of  the  island  to  the 
company,  upon  which  the  island  was  to  be  restored.  This 
decision  was  affirmed  upon  appeal.  The  Lord  Chancellor,  in 
rendering  the  decision,  said  (at  page  1236) : 

"I  do  not  say  that  the  owner  of  property  might  not  pro- 
mote and  form  a  joint- stock  company,  and  then  sell  his  prop- 
erty to  it,  but  I  do  say  that  if  he  does  he  is  bound  to  take  care 

2  I  Clark  &  Marshall  on  Corp.,  §  nob. 


464  CORPORATE  ARRANGEMENTS 

that  he  sells  it  to  the  company  through  the  medium  of  a  board 
of  directors  who  can  and  do  exercise  an  independent  and 
intelligent  judgment  on  the  transaction,  and  who  are  not 
left  under  the  belief  that  the  property  belongs,  not  to  the 
promoter,  but  to  some  other  person." 

The  doctrine  of  the  case  was,  first,  that  independent  di- 
rectors should  have  been  named;  and  second,  that  the  pro- 
moters should  have  made  full  disclosure  to  these  directors  of 
all  material  facts.  In  the  decision  it  was  intimated  that  if  one 
director  personally  beyond  suspicion  had  known  and  approved 
the  real  facts  as  to  the  increased  price,  it  might  have  been 
sufficient  to  validate  the  sale. 

The  doctrine  in  this  country  seems  to  be  similar.  When 
property  is  taken  by  promoters  for  the  purpose  of  sale  to 
the  corporation,  whether  by  purchase,  option,  or  agreement, 
they  are  bound  to  disclose  any  private  bargain  or  secret  profits. 
The  relations  are  confidential  and  each  person  is  bound,  as 
in  partnership,  to  act  with  entire  openness  and  fairness  to 
those  with  whom  he  is  associated.  The  law  as  to  this  is  very 
clear  and  has  been  passed  upon  again  and  again.  As  stated 
in  Densmore  v.  Densmore,  64  Pa.  St.  43  (1870): 

"Where  persons  form  such  an  association,  or  begin  or 
start  the  project  of  one,  from  that  time  they  do  stand  in  a 
confidential  relation  to  each  other,  and  to  all  others  who  may 
subsequently  become  members  or  subscribers,  and  it  is  not 
competent  for  any  of  them  to  purchase  property  for  the  pur- 
poses of  such  company,  and  then  sell  it  at  an  advance  without 
a  full  disclosure  of  the  facts." 

From  the  cases  cited  and  the  additional  cases  given 
hereafter,  it  will  be  seen  that  any  special  profits  made  by  the 
promoter  are  illegal  unless  made  with  the  full  knowledge  of  all 
the  others  interested,  or  with  the  consent  of  an  independent 
and  fully  informed  board  of  directors,  or  with  disclosure  of 
the  conditions  to  those  who  are  asked  to  subscribe  to  the 


CONCERNING   PROMOTERS 


465 


stock.'*  If  special  profits  are  made  otherwise,  suit  for  redress 
may  be  brought  at  any  subsequent  time  by  the  corporation, 
or,  under  some  circumstances,  by  the  stockholders  who  have 
contributed  to  the  promoter's  improper  profits  by  the  pur- 
chase of  stock  on  its  first  issue,  or  of  treasury  stock  there- 
after. 

It  is  to  be  noted  that  purchasers  of  stock  from  other 
stockholders  do  not  have  a  right  to  any  such  redress. 

"A  purchaser  of  shares  in  an  existing  corporation  from 
a  stockholder,  has  no  interest  in  the  application  of  the  money 
which  he  pays  for  the  shares,  but  it  is  quite  different  with  one 
who  agrees  to  subscribe  for  shares  in  a  corporation  to  be 
created."^ 

These  cases  where  suit  is  brought  for  the  restoration  of 
promoters'  profits  must  not  be  confused  with  that  other  class 
in  which  recovery  is  had  by  creditors  because  of  the  overvalua- 
tion of  property  turned  into  the  corporation  in  exchange  for 
stock,  or  bonds,  or  both.  The  two  cases  often  go  together, 
but  are  radically  different  in  their  nature.  An  improper 
profit  to  promoters  might  exist  without  any  overvaluation, 
and  an  overvaluation  might  exist  without  any  improper  profits 
to  the  promoters.  For  instance,  property  at  an  overvaluation 
might  be  accepted  by  the  corporation  and  its  stockholders 
with  a  full  knowledge  of  the  promoters'  profits.  They  would 
then  have  no  basis  for  proceedings  against  the  promoters.  A 
creditor  might,  however,  in  such  case  proceed  against  the 
stockholders  on  the  ground  of  an  overvaluation.  On  the  other 
hand,  the  property  might  be  put  into  the  corporation  at  a  fair 
figure,  but  the  promoters  receive  a  secret  commission,  or  re- 
bate or  other  improper  profit  on  the  sale.     In  such  case  there 


*  Fred  Macey  Co.  v.  Macey,  143;  Mich.  138  (1906);  s.  c,  152  Mich.  164  (1908"); 
Telegraph  v.  Loetscher,  127  Iowa  383  (1904) ;  Hinckley  v.  Oil  &  Pipe  Line  Co.,  1312 
Iowa  396  (1906);  Miss.  Lumber  Co.  v.  Joice,  176  III.  App.  iio  (1912) ;  Lomita  Land 
&   Water   Co.   v.    Robinson,   154  Gal.   36   (1908). 

5  Walker  v.  Anglo-Am.  M.  &  T.  Co.,  72  Hun  334,  34B  (1893);  Twycross  v.  Grant, 
2  G.   P.   Div.  469,  4S3   (1877). 


466  CORPORATE  ARRANGEMENTS 

would  be  good  grounds  for  proceeding  against  the  promoters 
for  the  recovery  of  the  improperly  gotten  profits. 

In  the  various  states  the  decisions  in  regard  to  promoters' 
profits  vary  in  their  tenor,  but  there  is  a  general  trend  toward 
a  stricter  construction  of  the  promoter's  duty  and  responsibil- 
ity to  his  corporation.® 

§  416.     Legitimate  Arrangements 

The  laws  are  very  clear  in  their  denunciation  of  the  pro- 
moter's secret  profits.  They  are  hardly  less  explicit  in  their 
recognition  of  the  promoter's  right  to  profits  if  secured  and 
taken  under  proper  conditions.  In  i  Morawetz  on  Private 
Corporations,  §  293,  it  is  said: 

"However,  there  is  no  rule  of  law  prohibiting  a  person 
from  forming  a  corporation  for  the  purpose  of  selling  prop- 
erty to  it  and  making  a  profit  from  the  sale.  The  law  merely 
requires  that  such  a  transaction  be  entirely  open  and  free 
from  deception  upon  the  company  and  those  who  become 
members." 

In  Plaquemines  Tropical  Fruit  Co.  v.  Buck,  52  N.  J.  Eq. 
219,  230  (1893),  following  the  case  of  Erlanger  v.  N.  S. 
P.  Co.,  already  quoted  from,  the  court  said: 

''Buck,  as  the  promoter  of  the  corporation,  stood  in  a  fidu- 
ciary relation  to  the  company  as  soon  as  it  was  organized. 
As  such  promoter,  it  was  open  to  him  to  sell  property  which 
he  owned,  to  the  company,  on  making  full  and  fair  disclosure 
of  his  interest  and  position  with  respect  to  that  property.  Not 
only  was  such  disclosure  necessary,  but  it  was  incumbent  on 
him,  as  sole  promoter  of  the  company,  formed  to  purchase  this 
specific  property,  controlling  and  moulding  its  organization, 
to  furnish  it  with  an  executive  or  board  of  directors  capable 


•  Hayward  v.  Leeson,  176  Mass.  310  (1900) ;  Old  Dominion  Copper  Co.  v.  Bige- 
low,  188  Mass.  315  (1905);  s.  c,  203  Mass.  159  (1909);  See  v.  Heppenheimer,  69  N.  J. 
Eq.  ^  (1905,);  Arnold  v.  Searing,  ;8  N.  J.  Eq.  146  (1910);  Bigelow  v.  Old  Dominion 
Copper  Co.,  74  N.  J.  Eq.  457  (1908);  Manning  v.  Berdan,  139  Fed.,  159  (1905); 
I^omita  Land  Co.  v.  Robinson,  154  Cal.  36  (1908) ;  Mason  v.  Carrothers,  105  Me. 
39a  (1909)' 


CONCERNING   PROMOTERS 


467 


of  forming  competent  and  impartial  judgment  as  to  the  wis- 
dom of  the  purchase  and  the  price  to  be  paid." 

To  summarize,  it  seems  very  clear  that  the  promoter  is 
well  within  his  rights  when  he  organizes  a  corporation  to 
purchase  his  own  property,  provided  that  such  purchase  is 
directed  by  an  independent  board  capable  of  impartial  judg- 
ment as  to  the  value  of  the  property  and  the  advisability  of  its 
purchase  by  the  corporation,  and  that  such  purchase  is  made 
with  full  knowledge  of  the  fact  that  the  property  in  question 
belongs  to  the  promoter. 

In  all  such  cases  the  promoter,  having  purchased  or  other- 
wise acquired  the  property  in  question  before  the  inception  of 
the  corporation,  was  not  and  could  not  in  any  way  have  been 
acting  as  the  agent  or  trustee  of  the  corporation  when  he  pur- 
chased the  property.  He  may  therefore  have  acquired  it  at 
any  price  or  in  any  way,  and,  when  later  the  corporation  is 
organized,  he  is  at  liberty  to  offer  his  property  to  the  corpora- 
tion at  any  advanced,  or  different  price  he  may  choose,  with- 
out divulging  the  profits  to  be  made  thereby.  The  one  essential 
is  that  the  promoter's  interest  in  the  property  shall  be  dis- 
closed, and  that  such  offering  shall  be  absolutely  without  mis- 
representation. If  he  represents  that  the  property  is  owned 
by  him  when  held  only  by  option,  or  that  it  is  turned  in  to  the 
corporation  at  the  cost  to  him  when  he  is  really  making  a 
profit,  such  misrepresentations  are,  under  the  circumstances, 
material  and  render  the  promoter  liable  for  the  secret  profits 
so  secured.  Without  such  misrepresentation,  however,  he  may 
make  what  profit  he  will. 

In  Parsons  v.  Hayes,  14  Abb.  N.  C.  (N.  Y.)  419  (1883), 
property  was  turned  in  at  a  gross  overvaluation,  but  the  only 
persons  in  interest  were  informed  of  all  details  and  did  not 
object;  therefore  the  promoters  were  held  to  be  within  their 
rights  and  the  contract  not  subject  to  rescission. 

Also  in  Tompkins  v.  Sperry,  Jones  &  Co.,  96  Md.  560 


468  CORPORATE  ARRANGEMENTS 

(1903),  a  receiver  attempted  to  hold  the  promoters  respon- 
sible under  the  same  circumstances,  but  his  application  was 
denied  on  the  ground  that  there  was  no  concealment  and 
therefore  no  wrong/ 

From  this  it  would  appear  that,  if  with  the  full  knowledge 
of  all  concerned  as  to  the  circumstances  thereof,  a  corpora- 
tion is  organized  and  property  is  exchanged  for  a  portion 
or  the  whole  of  its  stock,  the  completed  transaction  has  harmed 
no  one,  is  absolutely  legal,  and  is  not  open  to  later  objection 
by  any  of  the  parties  consenting  thereto.  The  promoters  may 
make  such  profits  as  they  please,  provided  the  other  partici- 
pating parties  consent  thereto,  and  up  to  this  point  the  trans- 
action is  legitimate  and  unobjectionable.^ 

Nor,  if  the  price  paid  for  the  property  taken  was  within 
reason,  or  capable  of  justification,  is  there  danger  of  any  sub- 
sequent objection,  no  matter  what  profit  may  have  been  made 
by  the  promoters.  Nor,  even  if  the  price  and  profits  were 
entirely  out  of  reason  and  totally  unjustifiable,  is  there  any 
danger  of  adverse  legal  action  if  creditors  and  subsequent 
stockholders  are  informed  as  to  the  conditions  before  they  give 
credit  to  the  corporation  or  invest  in  its  securities. 

If,  however,  the  promoters'  profits  are  excessive  or  un- 
reasonable, and  stock  is  sold  or  obligations  contracted  by  the 
corporation  without  proper  publicity  as  to  the  basis  of  credit 
or  stock  value,  a  cause  of  action  may  accrue  either  against 
those  who  originally  transferred  the  overvalued  property  to 
the  corporation,  or  against  the  holders  of  the  stock  which, 
as  shown  by  results,  was  not  full-paid.  This  would,  however, 
be  a  matter  only  of  overvaluation,  the  profits  received  by 
promoters  being  merely  an  incident  and  not  the  point  at 
issue.^ 


"^  See  also  Seymour  v.   Spring  Forest  Cemetery  Assn.,   144  N.  Y.  333,  (1895);  and 
Blum  V.    Whitney,   i8q    N.   Y.   232   (1906). 

'The  Insurance  Fress  v.   Montauk,  etc.,  Co.,   103  App.   Div.    (N.   Y.)  A72  (1905), 
•Salomon  v,  Salomon  &  Co.,  App.  Cases  22  (1897), 


CONCERNING   PROMOTERS 


469 


§  417.     Incidental  Liabilities  of  Promoter  and  Corporation 

The  relations  between  associated  promoters  will  be  de- 
termined by  their  agreements.  In  the  absence  of  any  agree- 
ment to  the  contrary,  one  promoter  may  require  contributions 
from  his  associates  for  any  expenses  or  outlay  incurred  in 
connection  with  their  undertaking. 

Promoters  receiving  subscriptions  for  the  stock  of  a  cor- 
poration to  be  organized  by  them,  are  responsible  to  the  sub- 
scribers for  the  amounts  received  if  they  fail  to  complete  the 
organization. 

If  promoters  perform  services  and  incur  expenses  in  pro- 
curing subscriptions,  or  in  doing  things  for  the  benefit  of 
the  prospective  corporation,  the  corporation  when  organized 
cannot  be  held  responsible  for  such  expenses  and  services, 
unless  it  expressly  undertakes  to  assume  them.  If  it  does 
assume  them,  the  benefits  received  by  the  corporation  from 
such  acts  and  expenditures  will  be  deemed  sufficient  consid- 
eration to  support  such  assumption. 

Contracts  and  agreements  made  for  a  corporation  before 
its  organization  by  a  promoter  do  not  bind  it,  unless  the  cor- 
poration accepts  the  same,  either  by  express  action,  or  im- 
pliedly, by  taking  the  benefit  of  such  contracts  and  agree- 
ments. 

A  promoter  entering  into  a  contract  on  behalf  of  a  cor- 
poration to  be  formed,  will  himself  be  liable  on  such  a  contract 
unless  it  is  expressly  understood  that  the  other  party  to  the 
contract  is  to  look  to  the  corporation  alone. 

An  agreement  by  a  promoter  with  the  vendor  of  property 
to  the  promoter's  corporation,  for  a  private  commission,  or 
the  excess  obtained  over  a  specified  price,  such  payment  or 
profit  being  unknown  to  the  corporation,  is  contrary  to  public 
policy  and  illegal  and  the  promoter  could  not  maintain  an 
action  to  recover.  This  comes  under  the  general  head  of 
secret  profits. 


470 


CORPORATE  ARRANGEMENTS 


§  418.     Restrictions  on  Sale  of  Stock 

When  a  corporation  is  organized  and  a  large  amount  of 
stock  is  turned  over  to  the  promoters  in  payment  for  prop- 
erty, it  is  often  desirable  to  restrict  the  sale  of  this  outstand- 
ing stock  for  a  limited  period,  in  order  to  permit  the  prior 
sale  of  treasury  stock,  or  to  obtain  other  ends.  This  is  some- 
times effected  by  placing  such  stock  in  a  voting  trust  for  a 
specified  period.  The  protection  here  from  a  sale  of  the  stock 
is,  however,  but  partial,  as  the  trustees'  certificates  might  still 
be  sold  and  interfere  with  the  purposes  of  the  restrictions;  but 
a  voting  trust  may  be  effective  to  keep  the  control  of  the  cor- 
poration in  the  promoter's  hands.^^ 

In  New  York  the  desired  end  may  be  attained  by  actual 
withdrawal  of  the  stock,  as  it  has  been  decided  that  promoters, 
by  agreement,  may  deposit  their  certificates  of  stock  with  a 
trust  company,  not  to  be  withdrawn  therefrom  or  sold  for  a 
specified  period  unless  by  mutual  consent.^^ 

Another  method,  practicable  in  New  York  at  least,  is  for 
the  stockholders  to  associate  themselves  and  have  their  stock 
issued  to  them  jointly,  with  an  agreement  that  such  certifi- 
cates shall  not  be  changed,  sold,  or  pledged  for  some  reason- 
able, specified  period,  except  upon  consent  of  all  interested. 
Such  an  arrangement  for  a  period  of  ten  years  was  upheld 
in  Hey  v.  Dolphin,  92  Hun  (N.  Y.)  230  (1895).  In  this 
case  the  contract  was  practically  one  of  partnership  in  the 
stock  for  the  designated  period.  A  power  of  attorney  given 
one  of  the  partners  to  vote  upon  this  stock  was  held  to  be 
irrevocable. 

If  another  method  of  restricting  the  sale  of  stock  is  de- 
sired, it  would  probably  be  practicable,  all  parties  consenting, 
to  make  a  valid  agreement  to  which  the  corporation  would  be 
a  party,  providing  that  certificates  for  certain  stock  should  not 


M  Gray  v.   Bloomington  &  N.   Ry.,   120  111.  App.   159   (i90S). 
"See  Williams  v.   Montgomery,  148  N.  Y.  519  (1896). 


CONCERNING   PROMOTERS  471 

be  issued  to  those  entitled  to  them,  unless  by  mutual  agree- 
ment, until  a  certain  specified  time  or  until  a  stated  proportion 
of  treasury  stock  had  been  sold. 

Generally,  however,  courts  do  not  favor  agreements  sus- 
pending or  restricting  the  right  of  alienation  of  stock,  such 
agreements  being  usually  held  contrary  to  public  policy  and 
void.'-     (See  §  405.) 

§  419.     Underwriting 

When  any  very  large  or  important  enterprise  is  to  be 
incorporated  and  financed,  it  is  customary  to  underwrite  the 
corporate  securities  before  they  are  offered  at  public  sale. 
This  practice  was  particularly  characteristic  of  the  organiza- 
tion of  the  industrial  combinations,  their  securities,  almost 
without  exception,  having  been  underwritten  before  they  were 
placed  on  the  market. 

Underwriting  is  not  an  agreement  to  guarantee  the  sale 
of  particular  stock  or  bonds  underwritten,  though  it  insures 
their  sale  at  a  specified  minimum  price.  It  is  in  fact  a  condi- 
tional subscription  for  such  securities,  the  underwriters  obli- 
gating themselves  to  buy  at  a  specified  price  all  of  the  under- 
written securities  not  sold  at  a  higher  specified  price  before 
a  fixed  date  or  within  a  certain  time  after  the  underwriting. 
The  inducement  to  the  underwriters  is  a  portion  or  even  the 
whole  of  the  advanced  price  at  which  it  is  to  be  offered  to 
the  public.  A  stock  bonus  is  often  given  the  underwriters  in 
addition  to,  or  in  lieu  of,  the  cash  profits. 

It  is  obvious  that  only  men  of  financial  responsibility  can 
successfully  engage  in  underwriting  and  that  the  enterprise 
underwritten  must  be  itself  sound  and  reputable. 

Common  stock,  preferred  stock,  or  bonds  may  be  under- 
written, though  usually  only  the  latter  two  are  utilized  for 
this  purpose.     An  underwriting  agreement  is  in  form  a  sub- 

"  Brown  v.  Britton,  41  App.  Div.  (N.  Y.)  57  (1899). 


472 


CORPORATE   ARRANGEMENTS 


scription  to  the  stock  or  bonds  involved,  the  body  of  the  agree- 
ment stating  in  detail  the  terms  and  conditions  under  which 
the  subscription  is  made.  It  is  usually  provided  that  the  in- 
strument is  to  go  into  effect  when  a  certain  minimum  amount 
has  been  underwritten.  The  underwriters  may,  if  necessary, 
advance  cash  on  the  underwriting,  or  advances  may  be  secured 
from  trust  companies  or  other  financial  institutions  on  the 
credit  of  the  underwriting. 

The  advantages  of  a  substantial  underwriting  are  material. 
The  success  of  the  flotation  is  assured  from  the  first  and  the 
managers  are  relieved  of  care  concerning  the  matter.  If  funds 
are  required  immediately,  advances  can  be  secured.  The  un- 
derwriting is  a  guarantee  of  the  soundness  of  the  enterprise 
by  responsible  people,  and  this  fact  gives  weight  and  credit 
to  the  whole  undertaking.  It  may  be  said  that  it  is  a  matter 
for  skilful  legal  and  financial  counsel  to  plan  and  put  through, 
as  both  judgment  and  experience  are  requisite. 


CHAPTER   LV 

PROTECTION  OF  MINORITY 

§  420.     General 

The  corporate  rights  of  minority  stockholders  are  at  the 
best  much  circumscribed  and  those  that  do  exist  are  fre- 
quently disregarded  and  are  then  difficult  of  enforcement. 
Not  infrequently  actions  of  the  directors  infringing  minority 
rights  are  not  discovered  by  the  minority  until  too  late  for 
prevention  or  protective  action,  and  legal  redress  is,  as  a  rule, 
slow,  costly,  and  inadequate.  Such  protection  as  may  be 
secured  to  the  minority  in  the  organization  of  the  corpora- 
tion is  therefore  a  matter  of  importance. 

When  the  parties  in  control  of  an  incorporation  are  will- 
ing to  recognize  the  rights  of  the  minority  stockholders,  or 
are  compelled  thereto  by  the  conditions,  it  is  quite  possible  for 
the  minority  to  secure  efficient  protection  for  such  rights  as 
are  properly  theirs.  Unfortunately  the  interests  which  con- 
trol at  the  time  a  corporation  is  organized  are  too  often  in- 
different or  actually  inimical  to  the  rights  of  the  minority 
stockholders,  and  these  then  receive  no  consideration,  save 
such  as  is  compelled  by  statute  law  or  by  respect  for  the  sen- 
sibilities of  the  investing  public. 

§421.     Rights  of  Minority  at  Common  Law 

Under  the  common  law — which  still  prevails  save  where 
and  as  superseded  or  modified  by  statute  law — the  rights  of 
minority  stockholders  were  not  extensive.  They  were  en- 
titled to  be  present  and  participate  at  stockholders'  meetings. 
They  were  entitled  to  inspect  the  corporate  stock  books  dur- 

473 


474  CORPORATE  ARRANGEMENTS 

ing  the  usual  hours  of  business  and  copy  the  names  therein 
if  they  so  desired.  They  also  had  the  right  under  reasonable 
conditions  to  inspect  the  books  of  account.  Also  under  the 
common  law  a  few  important  matters  such  as  amendment  of 
the  charter  and  the  sale  of  the  entire  corporate  assets  re- 
quired authorization  by  unanimous  vote  of  the  stockholders, 
and  this  requirement  gave  the  minority  a  certain  veto  power 
in  such  matters.  At  stockholders'  meetings  the  minority  might 
assist  in  the  deliberations,  but  the  majority  had  absolute  power 
to  adopt  by-laws  and  to  elect  the  entire  board  of  directors. 
The  minority  might  not  even  have  a  representative  present 
at  board  meetings  save  by  grace  of  the  majority. 

§  422.     Encroachment  on  Minority  Rights 

As  already  intimated,  minority  rights  under  the  common 
law  were,  at  the  best,  somewhat  slender.  There  is,  how- 
ever, in  some  states  a  certain  present  trend  toward  the  limita- 
tion and  curtailment  of  even  these  rights. 

At  common  law  the  minority  had  the  right  at  reasonable 
times  to  inspect  the  books  and  accounts  of  the  corporation. 
This  right  has  been  so  narrowed  down  by  latter-day  statutes 
and  decisions  that  it  is,  in  many  states,  negligible.  In  New 
Jersey  it  is  customary  to  limit  this  privilege  still  further  to 
such  inspection  as  the  directors  may  prescribe.  Even  the  stock 
and  transfer  books  may  be  seen  only  under  restrictions. 

As  to  books  of  account,  this  change  of  custom  is  prob- 
ably necessary.  If  it  were  otherwise,  business  competitors 
m.ight  avail  themselves  of  the  formerly  easily  acquired  right 
of  inspection  of  the  books  to  obtain  information  and  trade 
secrets  to  the  injury  of  the  corporation.^  Also,  with  the  many 
stockholders  and  the  complex  accounts  of  modern  corpora- 
tions, the  right,  if  freely  exercised,  would  interfere  with  the 
regular  transaction  of  business. 

^  In  re  De  Vengoechea,  86  N.  J.  L.  35  (1914). 


PROTECTION   OF   MINORITY 


475 


While  this  is  true,  some  substitute  for  the  stockholders' 
inspection  of  the  books  of  account  should  be  provided  that, 
without  injury  to  the  corporation,  would  give  to  the  stock- 
holders proper  information  as  to  the  status  of  the  corporate 
business.  To  deny  it  entirely  is  a  flagrant  and  unjustifiable 
disregard  of  the  rights  of  those  whose  property  is  at  stake. 

The  abridgment  of  the  stockholders'  right  to  inspect  the 
stock  and  transfer  books  is  to  be  viewed  with  distrust.  There 
would  seem  to  be  no  proper  reason  for  concealing  from  a 
stockholder  the  identity  of  his  fellow  stockholders.  The  right 
to  make  a  list  of  these  stockholders  is  properly  denied  him  if 
such  list  is  for  stock-selling  purposes,  for  sale  to  other  par- 
ties, for  general  circularization,  or  for  similar  purposes,  but 
should  not  be  refused  him  if  the  list  is  desired  for  purposes 
connected  with  the  corporation. 

Again,  the  right  to  make  by-laws  was  formerly  a  pre- 
rogative of  the  stockholders  alone,  and  these  by-laws  usually 
imposed  certain  proper  restraints  and  limitations  upon  the 
directors.  Now,  in  New  Jersey  and  a  few  other  states,  by 
charter  provision  it  is  possible  and  not  uncommon  to  give  the 
directors  absolute  power  to  repeal  by-laws  passed  by  the  stock- 
holders, and  to  substitute,  if  they  so  desire,  by-laws  of  their 
own  of  exactly  opposite  effect.  This  was  a  concession  to  the 
needs  of  the  "trusts"  with  their  centralization  of  power  and 
their  entire  subordination  of  the  individual  stockholder,  and 
is  perhaps  the  most  dangerous  of  all  the  innovations  upon  the 
old  rules,  as  it  virtually  releases  the  directors  from  all  neces- 
sity for  compliance  with  the  wishes  of  the  stockholders,  and 
leaves  in  their  hands  the  unrestrained  management  of  the 
corporate  affairs. 

It  will  be  understood  without  discussion  that  any  change 
in  the  law  acting  to  increase  the  powers  of  the  directors,  or 
to  remove  or  prevent  limitations  thereon,  distinctly  augments 
the  power  of  the  majority.      The  board  is   elected  by  the 


476  CORPORATE  ARRANGEMENTS 

majority  and  any  restraining  influences  that  exist  upon  the 
power  of  this  board  which  represents  the  majority  must  be 
found  in  the  charter,  by-laws,  and  statutes.  If,  then,  the  stat- 
utes are  relaxed,  charter  limitations  omitted,  and  the  board 
itself  given  the  power  to  make  and  amend  by-laws,  the  power 
of  the  board  as  the  representative  of  the  majority  is  greatly 
increased,  and  the  minority  interests  become  in  effect  a  neg- 
ligible quantity. 

Also  the  charter  may  be  more  easily  amended  than  for- 
merly. In  New  Jersey  such  amendment  may  be  accomplished 
by  a  two-third  vote  of  the  stockholders,  in  New  York  by  a 
three-fifth  vote,  and  in  Delaware  by  a  bare  majority  in  inter- 
est. This  latter  is  a  somewhat  remarkable  relaxation  of  the 
former  rule,  and  apparently  permits  a  mere  majority  to  change 
the  entire  nature  of  the  corporate  business,  as  for  example,  to 
divert  capital  invested  for  the  purpose  of  developing  a  pub- 
lishing business  into  the  exploitation  of  a  mining  claim.  It 
is  doubtful  whether  material  change  in  the  charter  should  be 
allowed  under  any  circumstances,  unless  by  the  practically 
unanimous  vote  of  all  concerned. 

In  consequence  of  these  tendencies  the  present  condition 
of  the  minority  stockholder,  unless  special  provision  is  made 
for  his  protection,  is  even  less  satisfactory  than  it  formerly 
was  under  the  common  law. 

§  423.     Protective  Measures 

The  legitimate  ends  sought  by  the  minority  are  honesty, 
efficiency,  and  reasonable  publicity  of  management — a  man- 
agement for  the  good  of  all  and  not  one  primarily  in  the  in- 
terests of  the  majority. 

The  means  that  may  be  employed  to  secure  these  ends 
are  of  two  general  classes,  the  one  consisting  of  such  arrange- 
ments, modifications,  or  restrictions  of  the  voting  power  as 
to  secure  to  the  minority  at  least  a  reasonable  representation 


PROTECTION   OF   MINORITY 


477 


on  the  board  of  directors;  the  other  consisting  of  provisions 
in  charter  or  by-laws  restraining  and  regulating  the  powers 
of  the  board  and  prescribing  safe  rules  for  the  conduct  of  the 
business. 

The  first-mentioned  method  is  the  most  effectual  for  the 
protection  of  the  minority  interests.  The  usual  cases  of  op- 
pression or  fraud  on  the  part  of  the  majority  occur  in  the 
absence  of  minority  representation  on  the  board.  If  the 
minority  have  one  or  more  directors  on  the  board,  the  ma- 
jority will  still,  as  a  matter  of  course,  control,  but  it  is  in  the 
highest  degree  improbable  that  this  control  will  be  exercised 
to  the  injury  of  minority  interests.  If  any  such  attempts 
are  made,  the  minority  stockholders  through  their  representa- 
tives on  the  board  will  be  fully  cognizant  of  the  proposed 
action,  may  enter  such  immediate  protests  and  make  such 
representations  as  they  see  fit,  and,  if  such  prejudicial  action 
is  persisted  in,  may  take  prompt  legal  action  to  protect  their 
interests. 

Without  this  board  representation,  charter  and  by-law  pro- 
visions for  the  protection  of  the  minority  are  apt  to  be  of 
but  little  effect.  With  board  action  free  from  supervision 
and  with  the  assistance  of  counsel  skilled  in  evasion  of  the  law, 
such  unsupported  provisions  may  be  easily  overcome  or 
avoided.  With  an  intelligent  minority  representation  on  the 
board,  such  infringements  of  minority  rights  would  not 
usually  even  be  contemplated. 

The  usual  measures  for  the  protection  of  minority  inter- 
ests are  considered  in  the  following  sections  of  the  present 
chapter. 

§  424.     Cumulative  Voting 

Cumulative  voting  is  one  of  the  most  effectual  means  of 
securing  minority  representation  on  the  board  of  directors. 
So  highly  are  the  results  of  this  system  esteemed  that  its  use 


478  CORPORATE  ARRANGEMENTS 

in  corporate  elections  is  prescribed  by  constitutional  provi- 
sions in  Pennsylvania,  Illinois,  California,  and  a  number  of 
other  states.  In  New  York,  New  Jersey,  and  some  other 
states  it  may  be  used  if  so  provided  in  the  corporate  charter. 
The  Constitution  of  the  State  of  Pennsylvania  outlines  the 
system  with  much  conciseness,  as  follows: 

*'In  all  elections  for  directors  or  managers  of  a  corpora- 
tion, each  member  or  shareholder  may  cast  the  whole  number 
of  his  votes  for  one  candidate  or  distribute  them  upon  two 
or  more  candidates  as  he  may  prefer." 

The  New  York  statutes  go  into  the  matter  more  fully: 

"The  certificate  of  incorporation  of  any  stock  corporation 
may  provide  that  at  all  elections  of  directors  of  such  corpora- 
tion, each  stockholder  shall  be  entitled  to  as  many  votes  as 
shall  equal  the  number  of  his  shares  of  stock  multiplied  by 
the  number  of  directors  to  be  elected,  and  that  he  may  cast 
all  of  such  votes  for  a  single  director  or  may  distribute  them 
among  the  number  to  be  voted  for,  or  any  two  or  more  of 
them  as  he  may  see  fit,  which  right,  when  exercised,  shall  be 
termed  cumulative  voting."^ 

Under  this  system  the  majority  control  and  manage  the 
corporation  absolutely,  but  the  minority  stockholders,  if  their 
holdings  are  at  all  material,  can  always  elect  one  or  more  di- 
rectors to  represent  them.  If  they  elect  capable  men,  there 
is  but  little  danger  that  the  minority  interests  will  suffer. 

To  obtain  the  best  results  from  cumulative  voting,  the 
minority  must  be  organized  to  some  extent  at  the  time  of  the 
annual  election,  and  should  delegate  by  proxy  to  some  few 
trusted  representatives  the  casting  of  their  ballots. 

To  cast  these  aggregated  votes  to  the  best  advantage 
sometimes  requires  nice  calculation.  For  instance,  in  a  cor- 
poration with  a  board  of  five  directors  and  lOO  shares  of  vot- 
ing stock,  each  share  will  have  the  right  to  cast  5  votes,  or 

»G.  C.  Law,  N.  Y.,  §24. 


PROTECTION   OF   MINORITY  ^yg 

a  total  for  all  the  voting  stock  of  500  votes.  In  such  case 
any  person  or  persons  controlling  17  shares  can  cast  85  votes, 
and  if  this  total  vote  is  cast  for  a  single  candidate  this  candi- 
date would  infallibly  be  elected.  The  aggregate  of  the  other 
votes  cast  would  be  415,  but  no  matter  how  they  were 
divided  among  the  other  candidates,  the  candidate  with  85 
votes  could  not  be  defeated.  If  evenly  divided  among  the 
five  aspirants  for  board  membership,  each  would  receive  83 
votes,  but  the  minority  candidate  with  85  votes  would  have 
a  plurality  of  the  votes  cast,  and  would  under  any  circum- 
stances have  enough  votes  to  insure  his  election.  Some  pre- 
liminary calculation  is  always  advisable. 

There  are  no  material  objections  to  the  system  of  cumu- 
lative voting,  and  it  should  be  adopted  wherever  possible. 
Its  increasing  use  is  a  practical  testimonial  to  its  value.  It 
must,  however,  be  used  with  intelligence,  or  the  results  are 
sometimes  surprising.  On  occasion  an  unsuspecting  majority 
have  so  scattered  their  votes  that  a  compact,  well-handled 
minority  have  actually  gained  control  of  the  board.  In 
other  words,  the  majority  threw  themselves  into  a  minority 
by  scattering.  For  instance,  in  the  example  given  above,  if 
the  minority,  instead  of  controlling  but  17  shares,  controlled 
45  shares  of  stock,  they  would  be  able  to  cast  225  votes  as 
against  275  votes  cast  by  the  majority.  The  minority  might 
then  very  safely  divide  their  votes  among  three  candidates, 
with  the  assurance  that  they  would  elect  at  least  two  directors 
and  might  elect  the  third.  The  majority  would  have  votes 
enough  to  elect  three  directors,  but,  if  they  thoughtlessly  scat- 
tered those  votes  among  four  or  five  candidates,  the  three 
minority  candidates,  with  over  70  votes  each,  would  be  elected 
and  would  control  the  board.  Such  an  election,  though  some- 
what unexpected  in  its  results,  is  legal  and  would  be  upheld 
wherever  cumulative  voting  is  properly  employed.      (See  § 

I55-) 


480  CORPORATE  ARRANGEMENTS 

§  425.     Classification  of  Stock 

Where  definite  divisions  of  interest  exist  among  the  stock- 
holders, or  intending  stockholders,  at  the  beginning  of  the 
corporate  organization,  classification  of  stock,  where  allow- 
able, may  be  employed  with  entire  confidence  that  each  class 
will  receive  due  representation  on  the  board.  Such  classifica- 
tion is  permitted  in  most  states,  and  should  be  secured  by 
charter  provision  where  possible,  elsewhere  by  by-laws  adopted 
before  stock  is  issued.  By-laws  of  this  nature,  so  adopted, 
become  in  effect  a  contract  with  those  purchasing  stock  and 
hence  are  not  susceptible  of  repeal  save  by  consent  of  all  in- 
terests.^ 

Under  such  an  arrangement  stock  may  be  divided  into  any 
classes  desired,  equal  or  unequal  in  amount.  To  each  of  these 
classes  may  be  assigned  one  or  more  directors,  and,  so  long 
as  the  corporate  organization  exists  unchanged,  each  of  these 
classes  will  elect  its  own  directors  to  the  board.  This  ar- 
rangement is  very  effective.  (See  §§  140,  437,  for  specific 
example. ) 

§  426.     Voting  Trusts 

The  general  subject  of  voting  trusts  is  considered  else- 
where. (See  Chapter  LII,  "Voting  Trusts.")  It  is  referred 
to  here  only  as  a  method  of  protecting  minority  rights 
where  these  interests  are  in  a  position  to  demand  such  pro- 
tection before  entering  the  corporation.  This  may  occur  where 
stock  in  a  corporation  is  offered  for  property,  or  where  a  part- 
nership is  to  be  incorporated  with  some  of  the  partners  hold- 
ing comparatively  small  interests. 

In  such  event  the  proposed  investment  or  arrangement 
may  be  acceptable  to  the  parties  concerned,  even  though  it 
places  them  in  a  hopeless  minority,  if  they  can  be  assured  ot 


3  Kent  V.  Quicksilver  iMining  Co.,  yS  N.  Y.  159,  178  (1879) ;  Loewenthal  v.   Rubber 
Rcc.    Co.,   52  N.   J.   Eq.  440   (18.J4). 


PROTECTION   OF  MINORITY 


481 


representation  on  the  board,  or  that  an  acceptable  manage- 
ment will  be  elected  and  retained  for  at  least  a  reasonable 
length  of  time.  In  any  such  case  the  desired  end  may  be 
effectually  secured  by  means  of  the  voting  trust. 

In  this  connection  it  may  be  noted  that  a  mere  agreement 
between  parties  holding  stock  that  such  stock  shall  be  voted 
for  certain  persons  or  in  a  prescribed  manner  will  not  be  en- 
forced by  the  courts  even  though  this  agreement  be  embodied 
in  a  formal  contract.  Under  some  circumstances  damages 
might  be  obtained  for  breach  of  such  a  contract,  but  the  con- 
tract itself  could  not  be  enforced  and  damages  would  usually 
be  very  difficult  to  prove."* 

§  427.     Special  Arrangements 

Many  other  arrangements  for  the  protection  of  the  min- 
ority or  of  particular  interests  are  possible,  depending  upon 
the  circumstances,  the  statutory  provisions  of  the  state  of  in- 
corporation, and  the  decisions  of  its  courts. 

In  those  states  where  special  provisions  may  be  inserted 
in  the  charter,  it  is  entirely  possible,  in  the  absence  of  express 
constitutional  and  statutory  prohibitions,  to  decrease  the  pro- 
portionate vote  of  the  stockholder  as  his  holding  increases,  or 
to  deny  the  voting  right  absolutely  after  a  certain  maximum 
vote  has  been  reached.  For  instance,  it  may  be  provided  that 
each  stockholder  shall  cast  one  vote  for  each  share  of  stock 
held  by  him  up  to  a  total  of  10  shares;  that  on  stock  in  excess 
of  this  amount  up  to  100  shares,  he  shall  have  one  vote  for 
each  5  shares;  that  on  all  stock  in  excess  of  100  shares  he 
shall  have  one  vote  for  each  10  shares.  This  is  the  voting 
provision  of  the  English  Companies  Act  which  has  some 
merits.  Any  other  apportionment  of  the  voting  power  may 
be  made,  or  it  may  be  provided  that  after  some  maximum  vote 
has  been  reached,  as  for  instance  10  votes  for  10  shares  held, 


*  Gage  V.   Fisher,  s  N.  D.  297  (1895). 


482  CORPORATE  ARRANGEMENTS 

no  further  vote  shall  be  cast  by  such  stockholder  no  matter 
what  his  holding. 

It  is  also  possible  to  place  the  number  of  votes  necessary 
to  elect  a  director  so  high  that  under  any  ordinary  circum- 
stances directors  cannot  be  elected  save  by  agreement.  For 
instance  if  a  three-fourths  vote  of  the  outstanding  voting  stock 
were  necessary  to  elect,  it  would  be  but  seldom  that  the 
majority  could  elect  without  minority  assistance.  Then  they 
must  either  allow  the  management  to  remain  without  change, 
as  will  be  the  case  if  there  is  no  election,  or  unite  with  the 
minority  to  elect.  If  this  were  necessary  they  would  hardly 
propose  anyone  objectionable  to  the  minority  element.  This 
plan  presupposes  an  existing  management  acceptable  to  all  the 
stockholders.     (See  §  429.) 

§  428.     Annual  Audits 

In  the  larger  corporations  the  auditing  of  the  books  of 
account  is  a  very  important  feature  of  the  corporate  opera- 
tions, and,  if  properly  conducted,  may  be  made  to  eliminate 
any  necessity  for  the  inspection  of  such  books  by  the  rank 
and  file  of  the  stockholders.-  Such  auditing  may  be  annual, 
quarterly,  or  held  at  irregular  intervals,  and,  if  made  by 
proper  parties,  serves  both  as  a  check  on  the  management  and 
a  verification  of  their  accounts.  The  results  of  these  audits 
give  the  stockholders  the  general  information  in  regard  to 
the  business  that  they  have  a  right  to  demand,  and,  as  inti- 
mated, thereby  remove  the  necessity  for  examination  of  the 
accounts  by  these  latter.  It  is,  of  course,  imperative  that  the 
professional  accountants  employed  as  auditors  be  absolutely 
reliable  and  thoroughly  qualified  for  their  work. 

§  429.     Charter  Limitations 

In  New  York,  New  Jersey,  and  some  other  states,  limita- 
tions on  the  power  of  the  majority  may  be  inserted  in  the 


PROTECTION   OF   MINORITY 


483 


charter.  At  the  inception  of  the  enterprise,  the  minority  are 
not  infrequently  in  a  position  to  demand  the  inclusion  of  such 
limitations  as  a  condition  precedent  to  their  participation  in 
the  incorporation.  Even  if  otherwise,  an  era  of  good  feeling 
generally  exists  at  this  stage  of  the  enterprise,  and  reasonable 
concessions  may  then  be  obtained  which  later  would  not  be 
possible.  The  minority  have  a  right  to  ask  safeguards  as  a 
condition  of  their  investing. 

An  instance  is  afforded  by  the  charter  of  one  of  the  prom- 
inent industrial  trusts  in  which  the  following  provision  is 
found : 

"It  is  hereby  provided  that  it  shall  require  a  majority  of 
seventy-five  per  cent  of  the  outstanding  voting  stock  to  amend 
the  charter,  to  amend  the  by-laws,  or  to  elect  directors  in 
this  company." 

Such  a  provision  is  directly  in  the  interests  of  the  minority. 
In  this  case  it  may  have  been  conceded  voluntarily,  but  prob- 
ably its  adoption  was  demanded  by  some  of  the  smaller  but 
necessary  component  corporations  as  one  of  the  conditions  of 
their  entrance  into  the  combination.  Under  such  a  provision 
no  changes  could  be  made  in  charter,  by-laws,  or  the  board 
of  directors  against  the  wishes  of  a  minority  controlling  26 
per  cent  of  the  voting  stock.  Under  such  circumstances  a  min- 
ority judiciously  handled  could  always  protect  its  interests. 
This  arrangement  cannot  be  had  in  New  York  as  the  statute 
specifies  that  directors  shall  be  elected  ''by  a  plurality  of  the 
votes  at  such  election." 

As  damage  to  minority  interests  or  the  wrecking  of  cor- 
porations is  almost  invariably  caused  by  improvident  contracts, 
unwarrantable  salaries,  or  excessive  indebtedness,  charter 
limitations  upon  the  power  of  the  board  in  these  directions 
are  of  frequent  occurrence.  Some  flexibilijty  is  usually  given 
to  these  restrictions  by  provision  that  their  limits  may  be 
exceeded  by  a  unanimous  vote  of  the  board,  or  by  a  two- 


484  CORPORATE  ARRANGEMENTS 

thirds  or  three-fourths  vote  of  the  outstanding  voting  stock, 
or  by  some  similar  provision. 

Where  these  Hmitations  exist,  it  is  important  that  some 
such  flexibiHty  be  provided,  as  otherwise  the  interests  of  the 
corporation  might  on  occasion  suffer  severely.  The  limits 
of  charter  provisions  cannot  be  legally  exceeded  by  the  cor- 
poration, either  by  action  of  the  directors  or  stockholders, 
except  as  specifically  allowed  by  the  charter  itself,  and  busi- 
ness opportunities  of  obvious  advantage  to  the  corporation 
might  be  lost  for  lack  of  the  power  to  meet  their  terms  or  con- 
ditions. 

It  is  also  possible  to  provide  in  the  charter  that  the  min- 
ority m^ay  have  reasonable  access  to  the  books  and  records 
of  the  corporation,  and  any  other  desired  privileges  not  in 
conflict  with  the  statutes  may  be  so  secured.  (See  §§  149,  158, 
225.) 

§  430.     Legal  Remedies 

Prevention  of  wrong  is  better  than  any  remedy,  but  a 
knowledge  of  their  rights  and  the  remedies  that  the  law  gives 
for  infringement  of  their  rights  is  sometimes  of  much  ad- 
vantage to  minority  stockholders.  The  usual  methods  of 
wronging  minority  stockholders,  such  as  paying  inordinate 
salaries,  withholding  dividends,  selling  or  leasing  corporate 
property  below  its  worth,  running  the  corporation  into  debts 
which  it  cannot  meet,  and  similar  fraudulent  and  oppressive 
transactions,  are  all  illegal  and  tortuous.  For  all  of  these 
wrongs  the  law  will  give  redress  if  those  who  suffer  will 
seek  it. 

When  salaries  are  wrongfully  increased  the  courts  will 
compel  restitution,  and  in  such  case  the  whole  of  the  inordi- 
nate salary  must  be  returned,  not  merely  the  excess.  Direc- 
tors are  trustees  and  cannot  use  their  power  as  such  to  en- 
rich themselves.    Neither  can  this  just  rule  be  evaded  by  each 


PROTECTION   OF   MINORITY  485 

director's  not  voting  on  his  own  salary  bul  letting  it  be  fixed 
by  his  brother  directors.^  Directors,  like  promoters,  will  be 
compelled  to  account  for  any  secret  profit  which  they  may 
make  in  any  transaction  in  which  the  corporation  is  inter- 
ested.^ 

The  directors  control  the  declaration  of  dividends. 
"When  a  corporation  has  a  surplus,  whether  a  dividend  shall 
be  made,  and  if  made,  how  much  it  shall  be,  and  when  and 
where  it  shall  be  payable,  rest  in  the  fair  and  honest  discre- 
tion of  the  directors  uncontrollable  by  the  courts."^  But  if 
this  discretion  is  not  honest  and  fair,  but  dividends  are  with- 
held to  discourage  minority  stockholders  and  induce  them  to 
sell  their  stock  at  low  prices,  the  courts  will  interfere  on 
behalf  of  the  minority.^ 

In  Fitchett  v.  Murphy,  46  A.  D.  181,  184,  185  (1899), 
the  court  said : 

"This  is  one  of  those  cases  where  a  majority  of  stock- 
holders have  entered  into  a  combination  to  control  the  affairs 
of  the  corporation  for  their  own  benefit  and  in  fraud  of  the 
rights  of  the  minority.  Such  a  combination  will  always  be 
rebuked  by  a  court  of  equity.  .  .  . 

"Directors  of  a  corporation  have  no  right  to  vote  salaries 
Jo  one  another  as  mere  incidents  of  their  office,  as  was  done 
here."^ 

Another  device  for  robbing  minority  stockholders  is  to 
make  improvident  contracts,  usually  with 'some  other  organi- 
zation with  which  the  offending  directors  are  connected. 
Many  such  cases  have  come  under  the  condemnation  of  the 


'Davids  v.  Davids,  1551  A.  D.  206  (1909);  Miner  v.  Ice  Co.,  93  Mich.  97  (1892); 
Butts  V  Wood,  37  N.  Y.  J17  (1867) ;  Tacobson  v.  Brooklyn  Lumber  Co.,  184  N.  Y. 
153  (1906);  Davis  v.  Thomas  &  Davis 'Co.,  63  N.  J.  Eq.  572  (1902);  Luthy  v.  Ream, 
270  111.   170   (1915)- 

« Billings  V.    Shaw,   209  N.    Y.    .--65  ('1913). 

7  Williams  v.  W.  U.  Telegraph  Co.,  93.  N.  Y.  162,  191  (1883);  Equitable  Life 
A««ur.  Soc.  V.  U.  P.  Railroad  Co.,  2x2  N.  Y.  360,  373.  (1914) ;  Hyams  v.  Old  Dom, 
Copper  Mining,  etc.,  Co.,  82  N.  J.  Eq.  507  (1913)-  „,„,„„  ^  „     .„ 

sHiscock  v.  Lacey,  9  Misc.  Rep.  (N.  Y.)  578  (1894);  Belfast,  etc.,  Co.,  v.  R.  R. 
Co..   77   Me.   44S  (1885). 

»  Bixler  v.  Summerfield,  195  111.  147  (1902). 


486  CORPORATE  ARRANGEMENTS 

courts.^"  In  such  a  case,  the  Supreme  Court  of  the  United 
States  said: 

"All  arrangements  by  directors  of  a  railroad  company, 
to  secure  an  undue  advantage  to  themselves  at  its  expense, 
by  the  formation  of  a  new  company  as  an  auxiliary  to  the 
original  one,  with  an  understanding  that  they,  or  some  of 
them,  shall  take  stock  in  it,  and,  that  valuable  contracts  shall 
be  given  to  it,  in  the  profits  of  which,  they,  as  stockholders 
in  the  new  company,  are  to  share,  are  so  many  unlawful 
devices  to  enrich  themselves  to  the  detriment  of  the  stock- 
holders and  creditors  of  the  original  company,  and  will  be 
condemned  whenever  properly  brought  before  the  courts  for 
consideration/^  Such  transactions  being  fraudulent  cannot 
be  authorized  or  ratified  by  a  majority  of  the  stockholders.^^ 

When  the  corporation  is  wrecked  by  purposely  running  it 
into  debt,  necessitating  a  receivership  and  subsequent  reorgan- 
ization, out  of  which  the  wreckers  in  some  form  profit,  it  is 
usually  dif^cult  to  prove  the  wrongdoing.  Bad  management 
in  good  faith  is  so  common  that  it  is  not  easy  to  draw  the 
line  and  show  in  any  particular  case  that  the  mismanagement 
was  intentional. 

Where  the  directors  do  not  use  ordinary  care  and  diligence 
in  the  discharge  of  their  duties,  they  are  liable  for  the  damage 
caused  by  their  negligence.^^  In  practice,  however,  it  may  be 
very  difficult  to  prove  such  negligence  as  will  entitle  the 
complaining  stockholders  to  damages.  In  one  notable  case, 
the  United  States  Supreme  Court  evidently  allowed  its  sympa- 
thies to  warp  its  judgment.^* 


^  Sage  V.  Culver,  147  N.  Y.  241  (1895);  Flynn  v.  Brooklyn  Citv  R.  R.  Co.,  158 
N.  Y.  493  (1809);  Jacobus  v.  Diamond  Soda  Water  Co.,  94  A.  D.  (N.  Y.)  366  (1904); 
Schwab  V.  Potter  Co.,  194  N.  Y.  409  (1909'). 

"Warden  v.   The  Railroad  Co..   103  U.    S.  651.  (iSSoV 

"  Dana  v.  Morgan,  219  Fed.  313  (1914) ;  Pollitz  v.  Wabash  R.  R.  Co.,  207  N.  Y. 
113,   127  (191 2). 

"•I  Cook  on  Corp.,  §702  and  cases  cited;  Chick  v.  Fuller,  114  Fed.  2?  (1902); 
Doe  V.  N.  W.,  etc.,  Co.,  78  Fed.  62  (1896);  Com.  Bank  v.  Chatfield,  127  Mich.  ^ 
(1901);  Bloom  V.  Savings,  etc.,  Co.,  15a  N.  Y.  114  (18971) ;  Sage  v.  Culver,  147  N.  Y. 
241   (18951). 

"  Briggs  V.  Spaulding,  1411  U.  S.  132  (1891). 


PROTECTION   OF  MINORITY 


487 


The  minority  stockholders  may  also,  under  certain  condi- 
tions, obtain  redress  against  the  majority  stockholders.  As  the 
directors  are  the  managers  of  the  corporate  business,  they  are 
usually  the  persons  responsible  for  the  infringement  of  the 
minority  stockholders'  rights.  However,  it  is  not  infre- 
quently the  case  that  another  corporation  or  group  of  men 
obtain  control  of  the  corporation  and  proceed  to  employ  it  to 
further  their  own  interests.  In  such  cases  it  has  been  held 
that  those  who  control  the  majority  of  the  stock  occupy  a 
fiduciary  relation  towards  the  minority,  and  that  acts  in  their 
own  interest  to  the  detriment  of  the  minority  stockholders  are 
wrongs  for  which  the  court  will  give  relief.^^ 

The  practical  difficulty  is  that  the  archaic  and  clumsy  pro- 
cedure of  our  courts  makes  litigation  so  slow  and  so  ex- 
pensive that  the  ordinary  citizen  cannot  afford,  in  most  cases, 
to  seek  the  redress  to  which  he  is  entitled.  By  the  theory  of 
the  law  he  may  right  his  wrong,  but  in  practice  the  cost  and 
delay  of  litigation  make  it  impossible. 


^Boyd  V.  N.  Y.  &  H.  R,  Co.,  220  Fed.  1741  (191  s) ;  Hyams  v.  Calumet  &  Hecla 
Mining  Co.,  221  Fed.  529  (1915) ;  Union  Pac.  R.  Co.  v.  Frank,  226  Fed.  906  (1915); 
McManus  v.  Durant,  168  App.  Div.  (N.  Y.)  64^  (191S1). 


CHAPTER   LVT 

INCORPORATING  A  PARTNERSHIP 

§  431.     General 

The  incorporation  of  a  partnership  involves  problems 
differing  from  those  of  the  incorporation  of  a  new  enterprise. 
These  problems  vary  with  the  conditions  and  requirements  of 
the  particular  partnership. 

If  the  partners  are  willing  to  adopt  the  simplest  and  most 
obvious  corporate  arrangements;  if  they  will  capitalize  at  the 
actual  values;  issue  all  the  capital  stock  in  payment  for  the 
values  transferred  to  the  corporation ;  allot  this  full-paid  stock 
to  the  various  partners  in  the  proportion  of  their  partnership 
interests,  and  thereafter  let  matters  take  their  natural  corpo- 
rate course,  the  duties  of  the  incorporating  counsel  are  not 
onerous.  Usually,  however,  the  parties  to  such  an  incorpora- 
tion are  not  willing  to  commit  themselves  so  irrevocably  to 
the  operations  of  the  unmodified  corporate  system.  They  are 
accustomed  to  the  conditions  of  the  partnership,  and  they 
wish  these  approximated  as  nearly  as  may  be  under  the  new 
regime. 

Possibly  all  the  partners,  without  regard  to  investment, 
may  be  participating  equally  in  the  management ;  or  one  part- 
ner, with  a  relatively  small  investment,  may  be  the  leading 
spirit  and  practically  in  control;  or  a  silent  partner,  taking 
no  active  part  in  the  management,  may  have  a  preponderant 
investment.  In  any  of  these  cases,  the  ordinary  operations 
of  the  corporate  system  would  work  a  radical  change,  and  it 
is  not  to  be  supposed  that  the  partners  would  agree  to  the 
entire  abolition  of  the  conditions  under  which  perhaps  they 

488 


INCORPORATING  A  PARTNERSHIP 


489 


have  achieved  success.  On  the  contrary,  they  usually  desire 
to  continue  the  existing  conditions.  This  may  be  done  with 
much  precision,  for  nowhere  does  the  flexibility  of  the  corpo- 
rate system  appear  to  better  advantage  than  in  its  ready  ad- 
justment to  the  varying  needs  of  partnership  incorporations. 

§  432.     Name 

The  partnership  name  should  in  itself  represent  a  consid- 
erable trade  value  that  would  be  lost  if  it  were  dropped  on 
incorporation.  To  avoid  this,  the  name  of  the  partnership  is 
usually  adopted,  as  nearly  as  may  be,  as  the  name  of  the  new 
corporation.  In  those  states  where  it  is  permissible,  the  part- 
nership name  is  not  infrequently  taken  without  modification 
as  the  corporate  designation.  This  practice  is,  however,  open 
to  objection,  as  there  is  then  nothing  in  the  corporate  name 
to  indicate  that  the  concern  is  a  corporation,  and  parties 
doing  business  with  it  might,  unless  informed  of  its  corpo- 
rate nature,  be  able  to  hold  the  stockholders  as  partners. 

Such  a  possibility  largely  eliminates  the  most  advanta- 
geous single  feature  of  incorporation — its  limited  liability — 
and  to  retain  this  feature,  while  still  preserving  the  actual 
form  of  the  partnership  name,  the  word  "Incorporated"  is 
frequently  added.  This  usually  appears  in  small  letters  below 
or  after  the  name,  sometimes  in  parentheses,  and  effectually 
prevents  any  danger  of  partnership  liability. 

In  some  states  the  word  "Company"  must  form  part  of 
every  corporate  name,  and  in  these  states  the  usual  practice 
when  a  partnership  is  incorporated  is  to  adopt  the  partner- 
ship name  with  the  prescribed  word  following — "Smith  & 
Jones"  becoming  on  incorporation  "Smith  &  Jones  Com- 
pany." This  practice  is  very  common  in  all  the  states,  whether 
required  by  law  or  otherwise,  and  is  generally  preferable  to 
the  use  of  the  unmodified  firm  name,  or  its  use  in  connection 
with  the  word  "Incorporated."     In  New  York  and  a  few 


490  CORPORATE  ARRANGEMENTS 

other  states,  the  word  "Incorporated,"  its  abbreviation  "Inc.", 
or  other  words  indicating  incorporation  must  be  used  in  the 
name  to  distinguish  clearly  the  corporation  from  an  indi- 
vidual or  partnership  business. 

Another  common,  modification  of  the  firm  name  is  to  sub- 
stitute a  hyphen  for  the  connecting  word  and  add  "Company," 
"Smith  &  Jones"  then  becoming  the  "Smith-Jones  Company." 
In  most  of  the  states  the  prefix  "The"  either  may  or  may 
not  be  made  part  of  the  corporate  name,  though  in  a  few 
states  its  use  is  obligatory.  Owing  to  the  additional  length 
given  the  corporate  name  by  its  use,  and  its  exceeding  awk- 
wardness in  certain  legal  constructions,  the  word  "The"  is 
better  omitted  unless  there  are  special  reasons  for  its  reten- 
tion.    (See  Chapter  XVII,  "The  Corporate  Name.") 

§  433.     Capitalization 

If  after  incorporation  the  partnership  business  is  to  go  on 
under  the  corporate  form  with  only  the  former  partners  in- 
terested, no  stock  being  sold  to  outsiders,  the  simplest  and 
possibly  most  satisfactory  basis  of  capitalization  is  the  actual 
value  of  the  assets  turned  into  the  hew  corporation,  without 
allowance  for  good  will,  trade-name,  01;  any  other  intangible 
assets.  Then,  on  incorporation  each  partner  will  participate 
in  the  stock  by  which  this  capitalization  is  represented,  dollar 
for  dollar,  to  the  amount  of  his  existing  partnership  invest- 
ment. 

Under  this  plan  the  capital  stock  of  the  new  company  is 
kept  at  a  comparatively  low  figure,  taxation  is  to  some  ex- 
tent avoided,  while  the  respective  proportionate  interests  of 
the  different  partners  are  accurately  preserved.  As  will  be 
readily  seen,  no  very  exact  estimate  of  the  value  of  the  busi- 
ness is  necessary  under  this  arrangement.  The  capital  stock 
merely  serves  as  a  convenient  method  of  adjusting  the  pro- 
portionate interests  of  the  partners,  and,  no  matter  what  its 


INCORPORATING  A  PARTNERSHIP        ^^i 

amount,  these  interests  are  still  represented  in  proper  pro- 
portion. 

If,  however,  new  members  are  to  be  taken  into  the  incor- 
porated business,  or  any  of  the  partners  expect  to  sell  stock, 
or  it  is  anticipated  that  at  any  time  in  the  near  future  stock 
will  change  hands,  the  proper  valuation  arid  capitalization  of 
the  business  become  matters  of  great  importance.  Then  the 
value  of  the  good-will  should  be  added  to  the  property 
values;  also  any  other  intangible  assets,  such  as  trade-names, 
trade-marks  and  copyrights,  should  be  included  at  a  fair 
figure.  All  of  these  are  valuable  assets  and  are  legitimately 
represented  in  the  capitalization  of  the  business.  Contem- 
plated profits  are  not  a  proper  basis  for  capitalization,^  but 
a  valuation  of  a  plant  based  upon  the  earnings  for  the  pre- 
vious year,  capitalized  at  6  per  cent  interest,  has  been  held 
proper.^ 

Any  desired  property  may,  of  course,  be  reserved  to  the 
partnership.  If  the  partners  wish  to  retain  a  portion  of  the 
cash  on  hand,  or  certain  portions  of  the  firm  realty  or  other 
property,  or  think  certain  accounts  better  in  their  own  hands, 
the  whole  matter  is  in  their  discretion.  They  may  retain  what 
they  will  and  transfer  what  they  will. 

The  form  of  capitalization  is  also  a  matter  of  conditions 
and  discretion.  It  may  be  all  common  stock,  or  preferred 
stock  and  bonds  may  be  added.  The  matter  rests  entirely 
with  the  partners.  If  it  is  decided  to  issue  bonds,  the  stock 
capitalization  will  naturally  be  reduced  by  just  that  amount. 
If  preferred  stock  is  issued,  the  common  stock  will  be  re- 
duced by  that  amount,  but  the  total  capitalization  will  re- 
main the  same. 

If  additional  capital  is  needed  for  the  business  of  the 
new  corporation  and  stock  must  be  sold  to  secure  it,  the 


*  See  V.  Heppenheimer,  69  N.  J.  Eq.  36  (1905). 

» Railway  Review  v.  G.  D.  &  M.  Tool  Co.,  84  N.  J.  Eq.  301   (.19^4)' 


492 


CORPORATE   ARRANGEMENTS 


amount  of  capitalization  determined  by  the  total  value  of  the 
partnership  assets — including  good-will — would  naturally  be 
increased  by  the  amount  of  stock  to  be  sold. 

§  434.     Exchange  of  Property  for  Stock 

The  value  of  the  partnership  business  and  property  having 
been  determined,  and  the  capitalization  of  the  corporation 
fixed  at  this  total  value,  the  business  as  a  going  concern  will 
be  offered  to  the  new  corporation  in  exchange  and  full  pay- 
ment for  all  its  capital  stock.  This  offer  should  be  by  formal 
written  proposition,  usually  signed  by  one  of  the  partners 
with  the  firm  name,  but  sometimes  signed  by  all  the  part- 
ners. 

This  proposition  is  usually  accepted  without  demur,  the 
new  corporation  authorizing  the  issue  of  its  capital  stock  in 
payment  for.  the  property.  The  capital  stock  will  then  be 
issued  in  accordance  with  the  terms  of  the  proposition,  and 
the  partnership  business  and  property  as  tendered  will  be 
transferred  to  the  corporation,  usually  by  formal  bill  of  sale, 
though  sometimes  by  mere  delivery  of  possession.  The  part- 
nership books  of  account  will  be  closed  by  proper  entries  show- 
ing the  transfer  to  the  corporation,  and  proper  corporate 
books  will  be  opened.  This  completes  the  transaction  as  be- 
tween the  partnership  and  the  corporation. 

The  corporation  then  owns  the  business  as  transferred  to 
it,  but  the  partnership  still  exists  with  the  stock  as  its  sole 
asset,  unless  some  of  the  partnership  property  has  been  re- 
served from  the  sale  to  the  corporation.  The  distribution  of 
this  stock  among  the  partners  in  accordance  with  previous 
agreements,  or  usually  in  proportion  to  their  respective  firm 
interests,  completes  the  usefulness  of  the  partnership.  It 
may  then  be  continued  in  a  quiescent  condition,  be  dissolved 
by  formal  agreement,  or  merely  be  allowed  to  lapse.  If  no 
partnership  property  was  reserved  and  the  stock  received  by 


INCORPORATING  A   PARTNERSHIP  493 

the  firm  is  distributed,  and  there  are  no  special  reasons  for 
its  continuation,  dissolution  by  formal  agreement  is  the  better 
practice,  avoiding  any  possibility  of  subsequent  entanglements 
or  liabilities.  If  it  is  desired  to  avoid  any  possibility  of 
future  liability  under  the  old  firm,  formal  notice  should  be 
given,  by  mail  or  publication,  of  the  incorporation  of  the 
business  and  the  dissolution  of  the  partnership. 

§  435«     Stock  Adjustments 

In  an  ordinary  partnership,  when  the  investments  are 
equal  or  nearly  so,  the  stock  received  in  exchange  for  the 
partnership  property  is  usually  all  common  stock  and  is  dis- 
tributed among  the  partners  in  proportion  to  their  respec- 
tive investments  in  the  old  partnership.  If,  however,  special 
conditions  are  to  be  met,  this  arrangement  may  be  varied 
almost  indefinitely. 

At  times  preferred  stock  is  desired  by  the  partners  to 
represent  a  portion,  at  least,  of  the  property  transferred  by 
them  to  the  corporation.  Such  stock  has  the  advantage  of 
its  fixed  preferential  dividend  that  must  be  paid  if  any  profits 
are  made,  and,  as  far  as  permitted  by  the  state  laws,  it  may 
be  given  any  other  powers  or  privileges  deemed  necessary. 

At  other  times  the  partners  will  perhaps  prefer  to  have 
a  portion  of  the  payment  for  property  transferred  to  the  cor- 
poration in  the  form  of  bonds.  Corporate  taxation  is  usually 
thereby  avoided,  though  personal  taxation  may  be  proportion- 
ately increased.  Beyond  this,  bonds  are  a  safe  and  very  con- 
venient form  of  corporate  security  to  hold  if  the  incorporated 
business  is,  in  whole  or  in  part,  going  into  new  hands. 

By  the  use  of  common  stock,  preferred  stock  of  varying 
powers  and  privileges,  and  bonds,  almost  any  requirements 
of  a  partnership  to  be  incorporated  may  be  satisfactorily  met. 
For  instance,  a  silent  partner's  interest  might  be  properly  pro- 
vided for  by  a  preferred  stock,  drawing  a  preferential  divi- 


494 


CORPORATE   ARRANGEMENTS 


dend  equal  to  the  rate  of  interest  theretofore  paid  upon  this 
partner's  investment,  or  participating  otherwise  in  profits  to 
the  same  extent  as  the  investment  did  before.  This  preferred 
stock  might  be  allowed  to  vote,  or  if  it  were  not  desirable 
that  the  silent  partner  should  participate  in  the  management, 
the  voting  right  might  be  denied,  or  his  entire  interest  might 
be  provided  for  by  an  issue  of  bonds  which  would  draw  a 
fixed  interest  without  regard  to  profits,  but  could  not  vote. 

Or  if  one  partner's  investment  were  much  larger  than  that 
of  other  partners',  but  equality  in  management  were  desired 
in  the  new  corporation,  the  excess  interest  of  the  one  partner 
might  be  provided  for  by  non-voting  preferred  stock,  by  a 
bond  issue,  or  perhaps  by  an  issue  of  common  stock  without 
the  voting  right.  In  the  latter  case  such  partner  would  par- 
ticipate in  all  profits  on  the  basis  of  the  full  amount  of  stock 
held  by  him  but  would  not  vote  on  the  excess  portion.  If 
his  excess  investment  were  in  bonds,  he  would  vote  and  partic- 
ipate in  dividends  on  the  basis  of  the  amount  of  stock  actually 
received  by  him,  but  would  receive  in  addition  the  fixed 
amount  of  interest  called  for  by  his  bonds.  Also,  at  some 
specified  date  he  would  receive  payment  of  the  face  of  his 
bonds,  his  excess  investment  under  these  conditions  consti- 
tuting a  preferred  claim  against  the  corporate  property.  Un- 
der the  preferred  stock  plan,  he  would  participate  in  profits 
to  the  full  on  his  quota  of  common  stock,  but  on  this  preferred 
stock  would,  as  usually  arranged,  participate  in  profits  only 
to  the  extent  of  his  preferred  dividend.  The  final  redemption 
of  such  preferred  stock  might  or  might  not,  according  to  the 
arrangement,  take  precedence  over  any  liquidation  of  the 
common  stock.     (See  Chapter  IX,  "Preferred  Stock.") 

§  436.     Board  of  Directors 

If  the  partners  take  the  amount  of  stock  in  the  new  cor- 
poration to  which  their  respective  partnership  interests  entitle 


INCORPORATING  A  PARTNERSHIP 


495 


them,  and  let  the  selection  of  the  board  take  its  natural  course 
thereafter,  the  matter  is  simple.  Usually,  however,  the  part- 
ners wish  an  equality  of  power  in  the  board,  or  a  specified 
representation,  or  a  classification,  or  some  other  special  ar- 
rangement, and  the  composition  and  method  of  electing  the 
board  of  directors  frequently  becomes  the  most  difficult  ques- 
tion arising  in  the  incorporation  of  a  partnership. 

Where  equality  of  power  is  desired,  each  partner  will 
usually  designate  one  or  more  directors  so  that  the  com- 
pleted board  will  contain  an  equal  number  of  representatives 
for  each  partner.  Where  the  partnership  consists  of  three  or 
more,  the  usual  practice  is  to  make  the  number  of  directors 
equal  to  the  number  of  partners,  elect  all  the  partners,  or  the 
chosen  representatives  of  any  partners  not  wishing  to  appear 
on  the  board,  and  then  make  provision  for  the  maintenance 
of  the  board  so  constituted.      (See  §  437.) 

Where  there  are  two  partners  the  matter  is  less  easily 
arranged.  Three  is  the  minimum  number  of  directors  usually 
allowed,  and  the  necessity  of  having  a  third  director  who 
really  has  the  deciding  vote  in  any  point  of  difference  makes 
the  situation  difficult.  Sometimes  a  confidential  clerk,  or  a 
mutual  friend,  or  the  wife  of  one  of  the  partners  is  chosen, 
but  in  event  of  any  difference,  the  result  is  apt  to  be  very  un- 
satisfactory. If  possible,  a  mutual  friend  of  character  and 
standing  may  be  elected  with  the  understanding  that  he  is 
not  to  be  involved  or  troubled  in  any  way  unless  serious 
differences  arise,  when  he  will  virtually  act  as  an  arbitrator. 
Another  plan  is  to  have  some  indifferent  person  accept  the 
office  and  immediately  resign,  leaving  the  third  position  vacant 
with  the  two  partners  in  control  to  fight  out  any  differences, 
just  as  they  would  have  done  in  the  days  of  the  partnership. 
If  this  plan  were  objectionable  on  account  of  the  incomplete 
condition  of  the  board,  the  membership  of  the  directorate 
might  be  fixed  at  four,  each  partner  being  elected  to  the  board 


496  CORPORATE  ARRANGEMENTS 

and  designating  an  additional  member.     In  such  case  it  may- 
be wise  to  provide  for  arbitration  in  case  of  a  deadlock. 

§  437.     Maintenance  of  Agreed  Management 

When  the  composition  and  manner  of  election  of  the 
board  of  directors  has  once  been  decided,  some  means  of 
securing  the  permanency  of  the  agreed  arrangement  is  usually 
desirable.  If  mere  representation  of  the  minority  interest  on 
the  board  is  desired,  this  may  usually  be  secured  by  the 
adoption  of  cumulative  voting.  In  some  states,  however, 
cumulative  voting  is  not  permissible,  and  in  many  cases  more 
than  minority  representation  is  desired.  Other  means  must 
then  be  adopted.     Some  of  these  are  as  follows: 

I.  By  Voting  Trust.  The  voting  trust  is  often  the  most 
satisfactory  means  of  preserving  the  agreed  status  of  cor- 
porate management,  the  members  of  the  old  partnership 
usually  constituting  the  membership  of  the  trust. 

The  objections  to  the  voting  trust  for  such  a  purpose  are 
its  limited  duration,  and  the  fact  that  the  stock  owned  by  the 
partners  is  itself  locked  up  in  the  trust,  and,  for  purposes  of 
sale  or  other  use,  must  be  represented  by  trustees'  certificates. 

In  New  York  and  Maryland  the  life  of  a  voting  trust  is 
by  statute  expressly  limited  to  five  years,  and  it  is  doubtful 
whether  the  arrangement  could  be  enforced  or  continued,  save 
by  mutual  consent,  for  a  longer  period.  In  states  where  there 
is  no  legislative  provision  in  regard  to  the  voting  trust,  it  is 
probable  that  a  trust  for  the  purpose  of  maintaining  an  agreed 
management  would  be  sustained  for  any  reasonable  period, 
as  ten  or  even  more  years. 

In  case  of  the  formation  of  a  voting  trust,  the  actual 
assignment  of  the  stock  to  the  trustees  cannot  be  avoided,  as 
irrevocable  proxies  would  be  practically  impossible  under  the 
usual  conditions.  The  owners  of  the  stock  must  therefore 
content  themselves  with  trustees'  certificates.     For  holding 


INCORPORATING   A   PARTNERSHIP  497 

and  for  some  other  purposes  these  certificates  would  not  be 
objectionable.  For  selling  or  for  use  as  collateral  they  would 
not  be  so  available  as  the  stock  itself.  (See  Chapter  LII, 
"Voting  Trusts.") 

2.  By  Voting  Requirements.  In  most  states  where  spe- 
cial charter  provisions  are  allowed,  it  may  be  provided  that 
any  desired  majority  shall  be  necessary  for  the  election  of 
directors,  and  this  majority  may  be  made  so  large — even  up  to 
the  unanimous  vote  of  all  the  outstanding  voting  stock — that 
the  agreed  status  of  the  board  can  be  disturbed  only  by  the 
active  consent  of  all  interested  parties.  Deadlocks  may  occur 
at  times  under  such  a  provision,  but  their  only  effect  would 
be  to  leave  the  board  in  statu  quo,  thus  maintaining  the  agreed 
arrangement  but  dispensing  with  the  election. 

It  would  be  but  rarely  advisable  or  wise  to  require  unani- 
mous consent  to  the  election  of  directors.  The  same  ends 
may  be  practically  secured  by  a  two-thirds  or  three- fourths 
majority,  and  the  danger  of  factious  opposition  by  holders  of 
a  small  number  of  shares  is  thereby  avoided. 

It  is  to  be  noted  that  under  this  arrangement,  in  event  of 
the  death  or  resignation  of  a  director,  the  interests  for  which 
such  director  stood  would  not  be  represented  on  the  board 
and  could  regain  such  representation  only  by  consent  of  suffi- 
cient stock  to  make  up  an  electing  majority.  This  objection 
to  the  plan  is  under  some  conditions  fatal. 

3.  By  Classification  of  Stock.  The  classification  of  stock 
offers  a  very  permanent  method  of  maintaining  a  representa- 
tive directorate.  Each  partner's  stock  may  be  constituted  a 
class  with  some  convenient  arbitrary  designation,  as  "Class 
A,"  "Class  B,"  or  "Class  i,"  "Class  2,"  etc.,  and  each  one 
of  these  classes  be  endowed  with  the  right  to  elect  one  or  more 
directors.  If  desired,  one  class  may  be  allotted  a  greater 
number  of  directors  than  others,  though  usually  each  class  is 
allowed  equal  power  as  to  the  election  of  directors. 


498  CORPORATE  ARRANGEMEKTS 

For  instance,  in  the  incorporation  of  a  partnership  with 
property  and  other  assets  of  the  estimated  value  of  $100,000, 
of  which  $50,000  belongs  to  one  partner,  $30,000  to  a  second, 
and  $20,000  to  a  third,  it  might  be  desired  that  the  same  equal 
participation  in  the  management  that  characterized  the  part- 
nership should  be  continued  in  the  corporation.  This  might 
be  effected  with  absolute  certainty  by  capitalizing  at  the  esti- 
mated value  and  dividing  this  stock  into  three  classes,  $50,000 
in  the  first,  $30,000  in  the  second,  and  $20,000  in  the  third ; 
giving  to  each  class  the  right  to  elect  one-third  of  the  mem- 
bership of  the  board,  and  issuing  to  each  partner  the  class 
of  stock  which  represents  his  partnership  interests.  Then, 
notwithstanding  their  very  unequal  interests  in  the  business, 
each  would  elect  one-third  the  total  number  of  directors.  If 
it  were  not  desired  to  secure  this  absolute  equality  in  the  man- 
agement of  the  business  but  merely  to  insure  representation 
to  the  two  minority  partners,  this  stock  might  be  classified 
as  before  on  any  apportionment  deemed  expedient,  the  first 
class  being  given,  say,  three  directors  of  a  board  of  five,  and 
the  second  and  third  classes,  one  each. 

Under  this  system  the  interests  holding  any  one  class  are 
absolutely  sure  that,  so  long  as  they  hold  their  stock  intact, 
or  hold  a  clear  majority  of  it,  they  can  elect  their  allotted 
membership  of  the  board,  and  that  in  no  other  way  than  by 
the  purchase  of  at  least  a  majority  of  their  stock  can  this 
representation  be  wrested  from  them.  It  is  obvious  that  the 
plan  is  capable  of  considerable  variation  to  fit  special  cases. 

A  modification  of  this  plan  where  equal  representation  is 
desired  is  to  divide  the  voting  stock  of  the  corporation  equally 
among  the  partners,  and  then  issue  preferred  stock  without  the 
voting  power  to  cover  the  excess  investment  of  any  particular 
partner.  Also,  where  more  capital  is  desired,  such  non-voting 
preferred  stock  may  be  sold  without  interfering  with  the 
original  division  of  power.     (See  §  140-) 


INCORPORATING  A   PARTNERSHIP  ^^q 

§  438.     Officers 

In  the  conversion  of  a  partnership  into  a  corporation,  little 
difficulty  is  experienced  in  the  selection  of  officers,  as  the 
partners  usually  take  these  positions;  their  previous  habits, 
duties,  and  positions  in  the  firm  designating  with  more  or  less 
precision  the  official  position  for  which  each  is  best  fitted. 

It  may  be  noted,  however,  if  there  is  difficulty  in  the 
assignment  of  the  official  positions,  that  outside  of  a  few 
matters  specified  or  implied  by  the  statutes  of  some  states, 
the  powers  and  duties  of  officers  may  be  fixed  absolutely  by 
charter  or  by-laws.  The  power  of  the  president  may  be 
restricted  in  any  way  the  conditions  seem  to  demand,  any  de- 
sired limitations  may  be  placed  upon  the  power  of  the  treas- 
urer, the  secretary  may  be  assigned  any  powers  or  duties 
within  or  without  the  usual  range,  and  any  or  all  of  these 
officers  may  be  made  as  dependent  upon,  or  as  independent 
of,  the  board  and  of  their  fellow  officers  as  may  be  deemed 
expedient. 

Usually  it  is  not  the  part  of  wisdom  to  vary  the  customary 
powers  and  relations  of  the  corporate  officers,  but  occasion- 
ally in  the  adjustment  of  partnership  relations  under  the  cor- 
porate form  such  changes  may  be  made  to  advantage. 

§  439.     Close  Corporations  and  Their  Conduct 

As  a  rule,  when  partnerships  are  incorporated  all  the 
stock  is  issued  to,  and  held  by,  the  former  partners,  who  are 
also  officers  and  directors  of  the  new  corporation.  The  cor- 
poration is  then  owned  by,  and  in  fact  composed  of,  these  few 
persons.  Such  a  corporation  in  which  all  the  stock  is  held 
by  a  few  persons  who  are  also  officers  and  directors  of  the 
corporation,  is  a  typical  "close"  corporation. 

The  conduct  of  a  close  corporation  can  be,  and  usually  is, 
more  informal  than  that  of  the  ordinary  corporation  with 
a  number  of  stockholders.     Especially  is  this  the  case  with 


500 


CORPORATE   ARRANGEMENTS 


incorporated  partnerships  where  the  members  of  the  new  cor- 
poration are  friends  and  associates  of  long  standing  and  are 
accustomed  to  working  together. 

The  business  of  a  close  corporation  of  this  nature  is  con- 
ducted with  the  same  informality  as  that  of  an  ordinary  part- 
nership. The  directors  and  officers  are  chosen  at  the  time  of 
organization,  and  it  is  usually  understood  that  this  organiza- 
tion is  to  be  permanent.  If  owing  to  death  or  withdrawal  a 
vacancy  occurs,  a  special  meeting  of  the  board  is  very  easily 
called  to  elect  a  successor.  The  various  duties  are  assigned 
to  the  different  officers  on  the  basis  of  their  duties  under  the 
partnership.  About  some  matters  all  will  confer;  other  mat- 
ters will  be  decided  by  special  officers  who  have  them  par- 
ticularly in  hand.  Frequently  some  one  man  dominates  every- 
thing and  directs  the  business  just  as  he  did  before  in  the 
partnership. 

The  profits  of  a  close  corporation  may  be  apportioned 
in  the  same  irregular  manner.  Usually  by  agreement  certain 
salaries  are  attached  to  the  various  official  positions,  and  most 
of  the  profits  are  taken  out  in  this  manner.  As  the  amount 
paid  in  salaries  diminishes  by  that  much  the  income  of  the 
corporation  and  thus  avoids  the  payment  of  state  and  federal 
income  taxes,  there  is  in  every  close  corporation  a  strong 
temptation  to  raise  the  salaries  of  the  principal  officers  to 
the  maximum  figure.  As  the  profits  of  a  close  corporation 
are  usually  largely  the  returns  for  personal  ability  and  business 
skill,  there  is  often  good  ground  for  the  payment  of  liberal 
salaries.  The  tax  officials  will,  however,  properly  interfere  if 
the  salaries  exceed  fair  payment  for  the  services  rendered  and 
are  obviously  being  used  to  evade  the  payment  of  taxes.  At 
some  future  time  it  is  likely  that  there  may  be  more  definite 
rules  on  this  subject  than  exist  at  present.  Now  it  is  hard  to 
decide  in  each  case  what  is  legally  and  ethically  justifiable. 

From  the  practical  standpoint,  the  free  and  easy  conduct 


INCORPORATING  A  PARTNERSHIP        ^qi 

of  the  ordinary  close  corporation  is  not  open  to  serious  criti- 
cism. Nor,  so  long  as  all  goes  well  and  no  stockholder 
objects,  and  no  creditors  remain  unpaid,  is  there  any  legal  ob- 
jection. 

How  far  the  courts  sustain  this  informal  conduct  of  close 
corporations  is  shown  by  the  following  cases: 

In  Hall  V.  Herter  Bros.,  83  Hun  (N.  Y.)  19,  22  (1894), 
a  partnership  had  incorporated  with  five  incorporators,  con- 
sisting of  the  two  partners,  the  father  of  one  partner,  the 
brother  of  the  other,  and  a  salesman  who  had  been  with  the 
partnership  for  some  time — a  typical  close  corporation.  Judge 
Alton  B.  Parker,  in  discussing  the  very  informal  procedure 
of  the  corporation,  said:  "Now,  when  there  are  so  few  inter- 
ested in  the  management  of  a  corporation,  ordinary  business 
may  be  transacted  without  the  formality  of  resolutions.  It 
may  be  done  by  conversation  without  formal  votes." 

In  the  Massachusetts  case  of  Melledge  v.  Boston  Iron 
Co.,  5  Cush.  158,  179  (1849),  the  court  said:  "Where  a 
corporation  consists  of  a  small  number  of  persons,  like  a 
partnership,  they  may  transact  all  their  business  by  conversa- 
sation  without  formal  votes." 

In  Little  v.  Garrabrant,  90  Hun  (N.  Y.)  404;  affirmed, 
153  N.  Y.  661  (1897),  a  corporation  consisted  of  Richard 
Worthington  holding  10  shares,  his  wife  holding  139  shares, 
her  housekeeper  holding  50  shares,  and  a  nephew  holding  i 
share.  "From  the  beginning  to  the  end  all  of  the  family  ex- 
penses, rent,  fire  insurance,  taxes,  together  with  their  con- 
tributions to  charity  and  church  and  missionary  societies,  were 
paid  out  of  moneys  of  the  Worthington  Company  by  checks 
drawn  against  its  account  in  the  bank  or  from  the  proceeds  of 
checks  thus  drawn."  Nevertheless  the  court  held  that  there 
was  no  illegality  in  this  exceedingly  loose  method  of  doing 
business,  and  that  creditors  who  became  such  after  the  time 
of  this  distribution  could  not  complain.     Creditors  who  were 


502 


CORPORATE  ARRANGEMENTS 


such  at  the  time  might  have  objected  to  the  very  irregular  dis- 
bursement of  the  corporate  funds,  but  creditors  who  became 
such  later  could  not. 

In  the  case  of  Groh  Sons  v.  Groh,  80  A.  D.  (N.  Y.)  85 
(1903),  where  a  brewery  owned  by  the  Groh  family  had  be- 
come incorporated,  the  court  said: 

"As  between  the  owners  and  holders  of  all  the  stock  of 
a  corporation,  it  must  in  principle  follow  that  the  members 
of  such  corporation  entitled  to  receive  dividends  may  agree 
among  themselves,  either  by  conversation  or  otherwise,  to 
appropriate  of  the  funds  of  the  corporation  a  specified  sum,  as 
agreed  upon,  and  distribute  the  same,  and  the  stockholders, 
upon  receipt  of  it,  will  acquire  good  title  thereto  as  against 
the  other  members  of  the  corporation.  It  amounts  to  a  mere 
division  of  the  property  by  agreement  of  all  the  parties  in 
interest,  and  as  between  them  it  is  perfectly  good  and  may 
not  be  attacked  zvhere  the  act  does  not  impair  the  rights  of 
third  parties/'^ 

The  decision  in  this  case  was  afterward  reversed;  not, 
however,  because  of  this  very  informal  method  of  declaring 
dividends,  but  on  other  grounds. 

In  the  consideration  of  close  corporations,  the  minimum 
number  of  stockholders  required  to  form  a  legal  corporation 
is  a  matter  of  importance.  The  minimum  of  incorporators 
in  most  of  the  states  is  three  and  this  fixes  the  original  number 
of  stockholders,  but  there  is  usually  no  statutory  requirement 
that  this  number  of  stockholders  shall  be  maintained.  It  is 
but  seldom  that  a  corporation  has  less  than  three  stockhold- 
ers, but  there  is  no  legal  objection  to  one  person  owning  all 
the  stock  of  a  corporation,  save  in  those  states  where  direc- 
tors must  be  stockholders.  There  would,  however,  be  prac- 
tical difficulties  in  the  conduct  of  a  corporation  with  but  one 


■ '  See  also  Eureka  Iron  Works  v.  Bresnahan,  60  Mich.  333  (1886) ;  Lemars  Shoe 
Store  Co.  v.  Manufacturing  Co.,  89  111.  App.  245.  (1899.) ;  Jordan  &  Co.  v.  Collins 
&  Co.,   107  Ala.  570  (1894). 


INCORPORATING  A   PARTNERSHIP 


503 


stockholder,  and  in  any  such  case  it  would  be  expedient  to  put 
at  least  the  nominal  ownership  of  one  or  more  shares  of  the 
stock  in  the  names  of  other  parties.  This  would  qualify  these 
others  for  board  positions  and  would  also  enable  them  to 
assist  in  holding  meetings.  In  England  it  has  been  held  that 
one  stockholder  cannot  conduct  a  meeting  by  himself,  but  in 
this  country  the  reverse  has  been  held.* 

In  most  of  the  states  three  directors  are  prescribed  by 
the  statutes,  and  if  the  directors  must  also  be  stockholders 
this  in  itself  necessitates  at  least  three  stockholders.  It  is 
always  possible  to  comply  with  any  legal  or  practical  require- 
ments for  additional  stockholders  by  placing  the  nominal  or 
actual  ownership  of  one  or  more  shares  of  stock  in  the  names 
of  suitable  parties. 

§440.     Restricting  the  Sale  of  Stock 

The  stock  of  a  close  corporation  is  usually  not  for  sale. 
On  the  other  hand,  a  stranger  would  not  usually  desire  to  buy 
stock  in  a  close  corporation,  as  the  stockholders  in  control,  if 
they  were  disposed  to  resent  the  intrusion  of  the  newcomer, 
could  combine  in  many  ways  to  make  his  holding  unsatisfac- 
tory. To  make  assurance  doubly  sure,  however,  special  ar- 
rangements are  often  made  to  prevent  the  sale  of  stock  in 
close  corporations  to  strangers.     (See  §  418.) 

The  most  common  method  of  attempting  this  is  the  pass- 
age of  a  by-law  prohibiting  the  sale  of  stock  to  anyone  not 
already  a  stockholder,  or  prohibiting  the  sale  of  stock  unless 
with  the  consent  of  the  directors,  or  unless  it  has  first  been 
offered  to  the  directors  at  a  price  not  greater  than  that  at 
which  it  is  subsequently  offered  or  sold  to  outsiders.  Such 
by-law  provisions  are  usually  illegal  and  incapable  of  enforce- 
ment, as  the  policy  of  the  law  is  dpposed  to  any  restrictions 


*  Sharp   V.    Dawes,   a   Q,    B.    Div.,   26    (1876);    In   re   Sanitary   Carbon    Co.,    la  W. 
N.  223  (1877);  contra    Morrill  v.  Little  Falls  Mfg.  Co.,  so  Minn.  37.1  (1893.). 


504 


CORPORATE   ARRANGEMENTS 


Upon  the  free  transfer  of  stock.  If  a  stockholder,  in  defiance 
of  the  terms  of  such  a  by-law,  should  sell  his  stock,  the  pur- 
chaser could  force  the  corporation  to  recognize  him  as  a  stock- 
holder and  to  issue  him  certificates  in  his  own  name. 

If,  however,  any  such  restriction  were  printed  on  the  stock 
certificate,  it  would,  regardless  of  its  legal  force,  make  the 
stock  extremely  difficult  to  sell  and  would  thus  indirectly 
accomplish  the  desired  end.  Few  people  care  to  purchase 
rights  which  may  require  tedious  and  expensive  process  of 
law  for  their  enforcement. 

In  one  case  a  by-law  was  framed  providing  that  no  trans- 
fer would  be  recognized  by  the  corporation  unless  the  writ- 
ten consent  thereto  of  the  three  directors  of  the  corporation 
was  indorsed  on  the  certificate.  This  by-law  was  embodied 
in  the  certificate,  and  a  blank  form  of  directors'  consent  was 
printed  on  the  back  with  places  for  the  signatures  of  the 
three  directors.  In  practice  this  effectually  prevented  the  sale 
of  the  stock,  but  if  anyone  had  in  defiance  of  the  provision 
purchased  the  stock  without  the  consent  of  the  directors,  he 
could  have  forced  the  corporation  to  recognize  his  rights  as 
a  stockholder. 

Stockholders  may,  however,  mutually  agree  to  give  each 
other  an  option  to  purchase  their  stock  at  a  specified  price, 
or  at  an  appraised  price,  or  at  a  price  not  greater  than  that  at 
which  it  afterwards  might  be  sold.  In  any  such  case  the  con- 
tract is  legal  as  between  the  stockholders;  but  if  in  violation 
of  his  agreement  a  stockholder  sold  his  stock,  the  purchaser 
would  take  it  unaffected  by  this  fact.  The  seller  might  be  held 
liable  in  damages  to  the  other  parties  but  the  sale  would  stand. 

In  a  New  York  case  four  parties,  wishing  to  perpetuate 
the  successful  management  of  a  valuable  business,  agreed  that 
in  event  of  the  death  of  any  of  the  parties,  or  in  event  of  any 
party  wishing  to  sell,  that  the  other  parties  should  have  a 
thirty-day  option  on  his  stock  at  $125  per  share.    When  one 


INCORPORATING  A   PARTNERSHIP 


50s 


of  the  parties  died,  his  executor  refused  to  carry  out  the 
contract.  Suit  was  brought  to  compel  specific  performance 
and  the  contract  was  upheld.^ 

There  is  a  Hne  of  cases  in  Massachusetts  and  New  Hamp- 
shire in  which  by-laws  restricting  the  alienation  of  stock 
have  been  sustained  as  between  the  parties  to  the  contract — 
i.e.,  the  stockholders  who  purchased  stock  knowing  of  and 
agreeing  to  the  by-law  restrictions — on  the  general  ground 
that,  while  such  a  by-law  might  be  contrary  to  public  policy 
as  it  applied  to  the  rights  of  outsiders,  it  was  valid  as  a  con- 
tract between  the  stockholders.® 


0  Scruggs  V.  Cotterill,  (>7  A.  D.  (N.  Y.)  583  (1902);  Costello  v.  Brewing  Co., 
69  N.   H.  405   (1898). 

°  Trust  Co.  V.  Abbott,  162  Mass.  148  (1894).  This  case  is  discussed  in  27  L.  R. 
A.  271;  Blue  Mt.,  etc.,  Assn.  v.  Borrowe,  71  N.  H.  69  (1901). 


CHAPTER   LVII 

CONSOLIDATION,    REORGANIZATION.    AND 
DISSOLUTION 

§  441.     Forms  of  Consolidation 

The  methods  by  which  corporations  may  be  practically 
unified  are  as  follows: 

1.  Consolidation  of  one  or  more  corporations  by  statutory 

procedure. 

2.  Purchase  by  a  corporation  of  the  entire  assets  of  one 

or  more  other  corporations. 

3.  Lease  by  a  corporation  of  the  entire  property  of  one 

or  more  other  corporations,  usually  for  a  specified 
amount  or  a  guaranteed  dividend. 

4.  Purchase  by  a  corporation  of  a  stock  control  in  one 

or  more  other  corporations. 

5.  Combination,  usually  by  means  of  a  holding  company.^ 

The  terms  consolidation,  combination,  merger,  and  amal- 
gamation are  loosely  applied  to  any  of  the  foregoing  plans 
for  joining  the  interests  of  two  or  more  corporations.  Strictly 
speaking,  a  consolidation  is  the  combination  or  merging,  by 
procedure  prescribed  by  the  statutes,  of  two  or  more  corpora- 
tions into  a  single  new  organization  embracing  the  respective 
interests  and  property  of  the  merged  corporations.^  Such  con- 
solidation without  statutory  authority  is  ultra  vires,  i.e.,  be- 
yond the  corporate  powers,  and  hence  void,  unless  authorized 
by  unanimous  vote  of  all  the  stockholders. 

In  any  case  where  it  is  desired  to  unify  corporate  busi- 


*  Noyes'   Intercorporate   Relations,    §  i. 

2  Green's  Brice's  Ultra  Vires   (Second  Edition),   §  6ji. 


506 


CONSOLIDATION   AND   REORGANIZATION 


507 


nesses,  careful  study  of  all  the  circumstances  and  local  stat- 
utes should  be  made  before  deciding  on  the  method  to  be 
followed,  in  order  on  the  one  hand  to  avoid  violation  of  cor- 
porate law,  and  on  the  other  hand  to  secure  the  most  effective 
possible  combination. 

§  442.     Statutory  Consolidation 

In  nearly  all  the  states  laws  are  provided  for  the  con- 
solidation of  non-competing  railroads.  Not  so  many  have 
statutes  authorizing  consolidation  of  business  corporations. 
Such  statutes,  when  they  exist,  are  usually  made  to  apply 
only  to  corporations  engaged  in  the  same  or  similar  busi- 
ness. Under  such  provisions  a  gas  company  and  an  electric 
light  company  have  been  held  competent  to  consolidate. 
Ordinary  business  corporations  rarely  combine  under  the 
statutory  provisions,  as  it  is  usually  simpler  to  unite  by  some 
other  method. 

Where  there  are  statutes  providing  for  consolidation,  it 
is  usually  specified  that  a  majority  or  two-thirds  or  three- 
fourths  of  the  stockholders  must  vote  in  favor  of  such  action. 
In  many  of  the  states  dissenting  stockholders  may  require  the 
corporation  to  purchase  their  stock  at  an  appraised  valuation. 
If  there  is  no  statutory  form  for  consolidation,  it  may,  unless 
in  some  way  prohibited,  always  be  authorized  by  the  unani- 
mous vote  of  all  the  stockholders. 

The  usual  procedure  for  statutory  consolidation  is  as 
follows: 

1.  Agreement  as  to  terms  by  directors  of  the  consolidating 

corporations. 

2.  Submission  of  directors'  agreement  to  the  stockholders 

of  each  company  at  a  duly  assembled  meeting. 

3.  Assent  of  the  stockholders  to  the  directors'  agreement 

by  a  required  vote. 


So8 


CORPORATE   ARRANGEMENTS 


4.  Filing  of  certified  copies  of  the  agreement  and  the 
vote  in  its  favor  in  the  same  offices  in  which  the 
original  certificate  of  incorporation  of  each  of  the 
consolidated  corporations  was  filed. 

§  443.     Consolidation  by  Sale  or  Lease  of  Assets 

1.  Sale  of  Assets.  When  all  the  stockholders  consent, 
a  business  corporation — as  distinguished  from  a  public  utili- 
ties corporation — may  sell  its  entire  assets  for  the  stock  of 
another  corporation.  The  first  corporation  may  then  dissolve 
and  divide  its  assets — which  consist  of  the  stock  of  the  other 
corporation — among  its  stockholders.  The  purchasing  cor- 
poration then  continues  both  its  own  business  and  the  business 
of  the  dissolved  corporation,  the  stockholders  of  the  defunct 
corporation  now  holding  their  proportionate  interest  in  the 
operating  corporation. 

This  is  the  simplest  and  best  method  of  effecting  a  con- 
solidation. The  only  obstacle  to  its  use  is  found  in  the  fact 
that  one  dissenting  stockholder  can  interpose  and  prevent  the 
consummation  of  the  plan.  In  such  case  it  is  often  possible 
to  buy  out  the  dissenting  stockholder  or  stockholders,  and 
carry  out  the  consolidation  as  proposed. 

A  public  utilities  corporation  having  a  franchise  derived 
from  the  public  is  not  free  to  sell  it  at  pleasure.  In  such 
cases  consolidation  must  be  effected  in  some  other  way. 

2.  Lease  of  Property.  A  lease  of  the  entire  property  of 
a  prosperous  corporation  may  be  made  only  by  unanimous 
consent  of  all  its  stockholders,  and  consolidation  by  means  of 
a  lease  contract  is  therefore  available  only  where  consolidation 
could  be  effected  by  sale  of  the  corporate  assets  as  already 
discussed. 

A  corporation  that  is  in  a  failing  condition  may,  how- 
ever, lease  its  property  by  action  of  its  directors,  or  of  a 
majority  of  its  stockholders  when  such  lease  is  for  the  best 


CONSOLIDATION   AND   REORGANIZATION  509 

interests  of  the  creditors  and  stockholders,^  and  in  this 
case  a  practical  consolidation  by  means  of  a  lease  is  pos- 
sible. 

In  many  cases  railroads  are  empowered  to  lease  their 
properties,  and  such  action  may  be  authorized  by  majority 
vote  of  the  stockholders.  A  practical  consolidation  by  means 
of  a  lease  is  then  possible.* 

Where  a  valid  lease  of  a  corporation's  entire  property  is 
made,  the  lessor  corporation's  only  active  business  operations 
are  then  the  reception  of  its  rentals  and  the  apportionment 
of  these  among  its  stockholders  as  dividends.  In  some  cases 
property  is  leased  on  the  basis  of  a  guaranty  of  a  certain 
dividend  on  the  stock  of  the  lessor  corporation. 

§  444.     Consolidation  by  Purchase  of  Controlling  Interest 

When  it  is  desired  to  unify  the  operations  of  two  or 
more  corporations,  it  may  be  done  by  the  common  owner- 
ship of  a  controlling  interest  in  each  corporation.  This  con- 
trolling interest  may  be  in  the  hands  of  an  individual,  a  syn- 
dicate, or  a  holding  corporation. 

The  approved  form  is  by  means  of  a  holding  corpora- 
tion, formed  under  the  laws  of  New  Jersey,  New  York, 
Maine,  Delaware,  or  some  other  state  where  corporations 
are  empowered  to  hold  the  stock  of  other  corporations.  This 
"holding  company"  buys  up  a  majority  of  the  stock  of  the 
companies  which  it  is  desired  to  unite.  At  the  next  annual 
elections  of  these  controlled  corporations  boards  of  dummy 
directors  are  elected,  who  manage  the  different  combined  cor- 
porations along  common  and  non-conflicting  lines  in  accord- 
ance with  the  instructions  of  the  holding  corporation. 

The  plan  was  a  very  effective  method  of  forming  a  trust. 
For  its  present  status,  see  §  41.1. 

'  Skinner  v.   Smith,  134  N.  Y.  240  (1892) ;   Bartholomew  v.  Derby  Rubber  Co.,  69 
Conn.   S2i   (1897). 

*Dady  v.  Georgia,  etc.,  Ry.,  112  Fed,  838  (1900). 


5IO  CORPORATE  ARRANGEMENTS 

§  445.     Combinations 

This  is  a  very  general  term  embracing  pooling  agree- 
ments, trusts,  the  different  forms  of  holding  companies,  and 
general  associations  to  prevent  competition,  maintain  prices, 
and  limit  production.  The  original  plan  of  a  board  of  trustees 
holding  controlling  interests  in  the  corporations  to  be  com- 
bined was  held  illegal.^  Partnership  agreements  between  cor- 
porations have  likewise  been  held  illegal. 

The  federal  statutes  and  the  statutes  of  almost  every  state 
in  the  Union  prohibit  and  provide  for  punishment  of  combina- 
tions in  restraint  of  trade  or  for  purposes  of  preventing  com- 
petition. It  is  difficult  or  impossible  at  the  present  time  to 
form  a  legal  combination  to  regulate  prices.     (See  §  411.) 

§  446.     Reorganization 

Reorganization  is  generally  employed  as  a  means  of  re- 
habilitating a  corporation  that  has  failed  or  become  financially 
embarrassed  or  entangled,  when  its  name,  property,  fran- 
chises, trade-marks,  or  good-will  are  still  worth  saving.  The 
term  is  loosely  applied  to  various  forms  of  consolidation,  new 
incorporations,  and  similar  arrangements. 

Reorganization  is  not  uncommon  in  the  case  of  railroads 
and  other  public  service  corporations.  The  franchises  of 
these  corporations  must  usually  be  operated  or  they  are  lost, 
and  stockholders  and  creditors  are,  as  a  rule,  better  satisfied 
to  have  the  corporation  continue  in  some  reorganized  form 
under  which  they  still  have  an  interest  or  recognized  claim, 
even  though  reduced,  than  to  permit  the  corporate  assets  to  be 
sold  for  the  inadequate  prices  of  a  forced  sale,  or  the  franchise 
to  lapse  for  non-user. 

Reorganization  is  also  not  infrequent  in  the  case  of  insol- 


» State  V.  Standard  Oil,  49  Ohio  137  (1892);  People  v.  North  River  Sugar  Re- 
fining Co.,   ici    N.   Y.   582  (1890). 

•Bishop  V.  Am.  Preservers  Co.,  157  111.  284  (1895);  Mallory  v.  Oil  Works,  86 
Tenn.  598  (1888). 


CONSOLIDATION   AND   REORGANIZATION  511 

vent  or  embarrassed  business  corporations  when  the  creditors 
consent  to  some  adjustment  or  arrangement  of  their  claims 
that  will  permit  the  corporate  business  to  continue.  The  re- 
organization in  such  case  may  be  limited  to  a  mere  issue  of 
additional  stock  or  bonds,  or  may  extend  so  far  as  to  be  in 
effect  a  new  incorporation. 

If  such  reorganization  is  not  possible  and  the  business 
of  the  embarrassed  corporation  is  of  sufficient  value,  the  usual 
plan  pursued  is  for  all  or  the  principal  stockholders  of  the 
old  corporation  to  form  a  new  and  entirely  distinct  corpora- 
tion. The  property  and  business  of  the  embarrassed  corpora- 
tion are  then  allowed  to  go  to  forced  sale  and  are  brought 
in  as  nearly  in  their  entirety  as  possible  by  the  new  corpora- 
tion. This  latter  then  takes  a  clear  title  to  these  assets  and 
conducts  the  business  thereafter  free  from  all  claims  of  credi- 
tors or  stockholders  of  the  old  corporation.  A  similar  pro- 
cedure is  sometimes  improperly  employed  in  order  to  "freeze 
out"  small  or  objectionable  stockholders,  the  corporation  being 
deliberately  involved  or  allowed  to  be  involved  for  the  pur- 
pose. 

§  447.     Dissolution 

A  corporation  may  be  dissolved  by  the  expiration  of  the 
term  for  which  the  charter  was  granted.  This  does  not,  how- 
ever, often  happen.  If  the  corporation  is  active  and  prosper- 
ous, some  form  of  reorganization  or  extension  of  the  corpo- 
rate existence  is  effected  before  the  expiration  of  its  charter 
period.  If  it  is  not  profitable,  it  is  usually  dissolved  or  allowed 
to  lapse  long  before  its  charter  term  expires. 

A  corporation  may  also  be  dissolved  by  insolvency.  In 
such  case  a  receiver  may  be  appointed  to  dispose  of  its  assets 
and  divide  the  proceeds  among  its  creditors,  or  the  corpora- 
tion may  be  allowed  to  go  into  bankruptcy  and  its  affairs  be 
wound  up  by  a  trustee.     Even  though  a  corporation  is  in- 


512  CORPORATE  ARRANGEMENTS 

solvent,  it  may  be  rescued  from  dissolution  by  an  abatement 
of  the  creditors'  claims,  or  by  the  contribution  of  additional 
capital  by  stockholders  or  others. 

A  corporation  may  always  be  dissolved  and  its  affairs  be 
wound  up  by  proper  procedure  if  all  its  stockholders  consent. 
In  many  states  a  majority  of  the  stockholders — and  in  some 
states  less  than  a  majority — may  dissolve  the  corporation 
under  some  circumstances  by  prescribed  statutory  procedure. 

Corporations  destitute  of  assets  are  sometimes  practically 
dissolved,  or  allowed  to  lapse  by  simply  ceasing  to  transact 
business.  Such  corporations  are  not  technically  out  of  exist- 
ence and  in  some  cases  their  officers  are  still  subject  to  lia- 
bilities. The  procedure  is,  however,  easy  and  inexpensive 
and  many  corporations  end  in  this  manner  regardless  of  the 
possible  liabilities  of  their  officials. 


Part  XIII — Allied  Forms  of  Organization 


CHAPTER   LVIII 

JOINT-STOCK  COMPANIES  AND  PARTNERSHIP 
ASSOCIATIONS 

§  448.    Joint-Stock  Companies 

In  the  United  States  an  unincorporated  joint-stock  com- 
pany with  its  capital  divided  into  transferable  shares  may  be 
formed  in  the  same  manner  as  an  ordinary  partnership, 
merely  by  agreement  of  the  parties.  Except  in  the  State  of 
New  York,  no  license  is  necessary,  no  public  registry  is  pre- 
scribed, nor  are  formalities  of  any  kind  required.  Such  an 
association  may  issue  transferable  certificates  of  stock,  and 
may  provide  against  termination  by  reason  of  the  death,  with- 
drawal, or  insolvency  of  one  or  more  of  its  members.  The 
association  may  designate  agents  to  attend  to  its  business  and 
then  only  these  authorized  agents  can  do  business  for  it.  The 
members  cannot  act  for  it  and  bind  it  as  in  an  ordinary  part- 
nership. The  members  of  such  a  common-law,  joint-stock 
company  are,  however,  subject  to  full  partnership  liability.^ 

In  New  York  any  joint-stock  association  doing  business 
in  the  state  must,  within  sixty  days  after  its  formation,  and 
thereafter  in  each  January,  file  with  the  Secretary  of  State  and 
with  the  county  clerk  a  written  certificate  giving  its  name, 


^Bates  on  Partnership,  §72;  Farnum  v.  Patch,  60  N.  H.  2^  (1880);  Carter  v. 
McClure,  98  Tenn.  T09  (1897) ;  Hoadley  v.  Commissioners,  105,  Mass.  519  (1870) ;  Bank 
V.  Dean,  124  Mass.  81  (1878);  Edwards  v.  Warren  Linoline,  etc..  Works  and  Trustee, 
168  Mass.  964.  (1897);  Taber  v.  Breck,  102  Mass.  re^s  (iqo6);  Frost  v.  Walker,  60  Me. 
468  (i87ca) ;  W  adsworth  v.  Duncan,  1641  111.  360  (i8t^) ;  Phillips  v.  Blatchford,  137  Mass. 
510  (1884);  Roberts  v.  Anderson,  226  Fed.  7  (1915). 


514 


ALLIED   FORMS   OF   ORGANIZATION 


date  of  organization,  number  of  stockholders,  names  and  resi- 
dences of  its  officers,  and  its  place  of  business.  The  statutes 
empower  it  under  certain  circumstances  to  hold  real  property 
in  the  name  of  its  president,  and  it  may  mortgage  such  real 
estate  by  the  same  procedure  as  is  required  of  a  corporation. 
These  organizations  have  come  up  before  the  courts  of  New 
York  from  time  to  time  and  it  has  been  repeatedly  held  that 
"a  joint-stock  company  is  a  partnership  with  some  of  the 
powers  of  a  corporation."^ 

In  People  v.  Coleman,  133  N.  Y.  279  (1892),  the  court 
said  of  the  National  Express  Company:  "The  company  was 
formed  as  a  joint-stock  company  or  association  in  1853  by  a 
written  agreement  of  eight  individuals  with  each  other,  the 
whole  force  and  effect  of  which,  in  constituting  and  creating 
the  organization,  rested  upon  the  common  law  rights  of  the 
individuals  and  their  power  to  contract  with  each  other.  The 
relation  they  assumed  was  wholly  the  product  of  their  mutual 
agreement,  and  dependent  in  no  respect  upon  the  grant  or 
authority  of  the  state.  It  was  entered  into  under  no  statutory 
license  or  permission,  neither  accepting  nor  designed  to  ac- 
cept any  franchise  from  the  sovereign,  but  founded  wholly 
upon  the  individual  rights  of  the  associates  to  join  their 
capital  in  an  enterprise  in  a  relation  similar  to  that  of  a  part- 
nership." 

The  joint-stock  company  form,  while  advantageous  in 
many  respects,  is  not  extensively  used,  for  the  following  rea- 
sons: 

1.  The  members  of  the  company  are  individually  liable 
for  its  entire  obligations. 

2.  While  the  company  can  do  business  under  its  com- 
pany name,  it  cannot  hold  real  property  or  convey  the  same 
by  its  collective  name,  the  conditions  requiring  any  deed  or 


•Hibbs  V.   Brown,  190  N.  Y.   167  (1907);  Matter  of  Jones,  172  N.  Y.  57s  (1902); 
Van  Aernam  v.  Bleistein,  102  N.  Y.  355  (1886). 


JOINT-STOCK   COMPANIES  tjc 

encumbrance  of  real  property  to  be  executed  by  every  member 
of  the  company,  unless  such  real  property  is  taken  and  held 
by  some  agent  or  officer  as  trustee  for  the  company,  when 
conveyances  or  encumbrances  must  be  executed  by  this 
trustee. 

3.  The  joint-stock  company  must  bring  suit  in  the  names 
of  the  individuals  composing  it  and,  if  it  is  sued,  only  those 
members  who  are  served  with  process  can  be  held. 

In  New  York  it  is  provided  that  any  joint-stock  company 
or  association  may  sue  or  be  sued  in  the  name  of  the  president 
or  treasurer,  and  individual  members  shall  not  be  sued  until 
execution  against  the  company  has  been  returned  unsatisfied. 
This  provision  seems  to  apply  to  all  New  York  copartner- 
ships of  seven  or  more.     It  is  not  found  in  other  states.^ 

Several  of  the  leading  express  companies  of  the  country 
are  organized  as  joint-stock  companies  and  in  these  cases  the 
arrangement  seems  to  have  worked  well.  These  companies 
have  been  before  the  courts  many  times  and  the  cases  will  be 
found  instructive.* 

The  common  law  joint-stock  company  has  advantages 
over  the  ordinary  partnership  that  should  commend  it  in 
some  cases  at  least,  and  particularly  where  the  publicity  and 
liability  to  taxation  of  the  corporate  form  are  objectionable. 
In  many  businesses  the  danger  of  partnership  liability  is  too 
remote  to  trouble  the  members,  and  in  such  cases  the  joint- 
stock  organization  secures  the  same  transferability  and  divisi- 
bility of  interests  as  does  the  corporation,  and  also  avoids 
the  interruption  often  caused  by  the  death  of  a  partner.  The 
joint-stock  company  could  not  usually  be  employed  where 
stock  is  to  be  sold  to  investors,  as  these  would  not  risk  the 


*Taft  V.  Ward,  106  Mass.  518  (1871).  In  -the  report  of  this  case  a  full  outline 
of  the  articles  of  association  of  the   New   England  Express  Co.   is  given. 

*  Chapman  v.  Barney,  129  U.  S.  677  (1888);  Express  Co.  v.  State,  55  O.  St.  69 
(1896);  Edgeworth  v.  Wood,  58  N.  J.  L.  463  (1896);  Sanford  v.  Gregg,  58  Fed.  620 
(1893);  Gregg  V.  Sanford,  65  Fed.  151  (1895);  Boston,  etc.,  Railroad  v.  Pearson,  i^ 
Mass.  445  (1879). 


5i6  ALLIED   FORMS   OF   ORGANIZATION 

partnership  liability  involved.  It  could,  however,  be  used  in 
many  cases  as  a  substitute  for  the  close  corporation.  In  such 
case  the  articles  of  association  should  be  carefully  prepared, 
as — "The  articles  of  association  of  an  unincorporated  joint- 
stock  company  bear  the  same  relation  to  it  that  the  charter 
bears  to  an  incorporated  company.  They  regulate  the  duties 
of  the  officers  and  the  duties  and  obligations  of  the  members 
of  such  a  company  among  themselves."^ 

§  449.     Partnership  Associations 

In  Pennsylvania  and  Michigan  the  statutes  provide  for 
the  organization  of  what  are  termed  "partnership  associa- 
tions." These  have  nothing  in  common  with  the  voluntary 
associations  of  Massachusetts.  They  differ  from  a  corpora- 
tion only  in  the  following  particulars: 

1.  Interests  in  a  partnership  association  may  be  trans- 
ferred as  provided  by  the  rules  and  regulations  of  each  associa- 
tion— in  most  cases,  the  association  adopts  the  plan  of  stock 
certificates — ^but  in  case  of  a  transfer  the  transferee  must  be 
elected  a  member  of  the  association  before  he  can  vote  or  par- 
ticipate in  the  management.  If  he  is  not  elected,  the  interest 
already  transferred  to  him  must  be  bought  out  at  an  agreed 
price,  or,  in  default  of  such  an  agreement,  an  appraiser  ap- 
pointed by  the  court  will  appraise  the  same. 

2.  Originally  no  special  fees  or  taxes  were  imposed  upon 
these  associations  in  the  state  where  they  were  formed;  but 
now  in  both  Pennsylvania  and  Michigan  organization  fees 
similar  to  organization  fees  of  corporations  are  prescribed. 

In  Pennsylvania,  when  a  partnership  association  is  to  be 
formed,  a  statement  answering  in  a  general  way  to  a  certifi- 
cate of  incorporation  must  be  made  by  three  or  more  persons 
and  filed  with  the  recorder  of  deeds  for  the  county.  The  filing 
fees  are  nominal,  but  a  bonus  of  one-third  of  one  per  cent 


Bray  v.  Farwell,  8i  N.  Y.  6qo  (1880). 


PARTNERSHIP   ASSOCIATIONS  517 

Upon  the  amount  of  the  capital  stock  must  be  paid  to  the  State 
Treasurer. 

In  Michigan  partnership  associations  were  first  author- 
ized in  1877,  ^^d  the  provisions  were  as  simple  as  in  Penn- 
sylvania. 

In  1903  the  legislature  amended  the  law,  and  now  the  pro- 
cedure for  the  formation  of  a  voluntary  association  is  simi- 
lar to  that  for  the  organization  of  a  corporation.  As  stated 
by  the  statute,  three  or  more  persons  desiring  to  secure  limited 
liability  must  sign  and  acknowledge  a  statement  or  articles 
of  association  giving  their  full  names  and  the  amount  of  cap- 
ital subscribed  by  each ;  the  total  capital  and  when  and  where  to 
be  paid;  the  character  of  the  business;  its  location;  the  name 
of  the  association  followed  by  the  word  "limited" ;  its  duration 
not  exceeding  twenty  years;  and  the  names  of  the  officers. 
This  statement  is  to  be  recorded  in  the  offices  of  the  Secretary 
of  State  and  of  the  county  clerk  and  a  fee  of  one-twentieth  of 
one  per  cent  is  to  be  paid  on  organization.  Thereafter  annual 
reports  are  to  be  made.  In  Michigan,  for  the  protection  of 
the  minority,  cumulative  voting  has  been  provided  for  in  the 
election  of  managers. 

In  Pennsylvania  the  court  characterized  associations  of 
this  nature  as  "quasi  corporations,"  stating  that  "technically 
they  were  not  corporations  but  had  many  of  the  features  of  a 
corporation,"  and  held  that  in  ascertaining  their  legal  status 
both  the  law  of  corporations  and  the  law  of  partnerships 
should  be  resorted  to  according  to  the  particular  feature  under 
consideration.^ 

In  Michigan  partnership  associations  are  governed  by  the 
law  of  corporations  rather  than  by  the  law  of  limited  part- 
nerships.^ 


«  Carter  v.  Producers'  Oil  Co.,  182  Pa.  St.  55^.  5^3  (1897)- 

T  Rouse,  etc.,  Co.  v.  Detroit,  etc.,  Co.,  in  Mich.  25J  (1896);  s.  C.  38  L..  R.  A. 
794;  Wood  V.  Sloman,  150  Mich.  177  (1907');  Armstrong  v.  Stearns,  156  Mich.  597 
(iooq). 


5i8  ALLIED   FORMS   OF   ORGANIZATION 

In  a  case  in  one  of  the  Federal  courts  it  was  held  that 
they  were  in  effect  corporations.  The  court  said:  "But  these 
associations  authorized  by  the  Pennsylvania  act  of  1874  pos- 
sess every  attribute  deemed  essential  to  the  existence  of  a  cor- 
poration. .  .  .  When  organized,  they  constitute  a  new  ar- 
tificial person,  endowed  with  the  power  of  suing  and  being 
sued,  and  of  acquiring,  holding  and  conveying  property  in  its 
artificial  character.  Created  by  compliance  with  the  constat- 
ing law,  they  can  be  dissolved  only  in  the  way  pointed  out 
by  that  law.  Individual  liability  for  corporate  debts,  beyond 
unpaid  subscription  to  the  capital  stock,  does  not  exist. "^ 

This  decision  was  later  overruled  by  the  Supreme  Court 
of  the  United  Sates,  which  refused  to  consider  a  partner- 
ship association  under  Pennsylvania  laws  as  being  anything 
more  than  a  joint- stock  company.® 

In  Massachusetts  also,  the  Supreme  Court  refused  to  treat 
these  partnership  associations  otherwise  than  as  ordinary 
joint-stock  companies  and  held  that  a  Pennsylvania  partner- 
ship association  could  not  be  sued  under  its  associate  name  in 
the  courts  of  Massachusetts,  and  approved  the  doctrine  that 
"at  common  law  a  joint-stock  company  formed  for  business 
purposes,  is  considered  in  this  commonwealth  merely  as  a 
partnership."^^ 

The  partnership  associations  may  be  useful  in  the  respec- 
tive states  which  provide  for  their  formation,  but  their  legal 
status  elsewhere  is  too  uncertain  for  their  use  by  businesses 
operating  in  other  states.  If  the  states  of  Pennsylvania  and 
Michigan  had  lowered  their  corporate  fees  and  taxes,  and  thus 
made  the  corporation  form  more  generally  available  and  at- 
tractive, they  would  have  served  all  practical  ends  better  than 
by  the  creation  of  a  new  form  of  nondescript  business  organ- 
ization. 


8  Andrews  Bros.  v.  Youngstown  Coke  Co.,  Ltd.,  86  Fed.  5J89,  590  (1898). 
•Great  So.   Hotel  Co.  v.  Jones,  177  U.   S.  449  (1899)-  ^„  ,,  ,     ,  „    x 

"  Edwards  v.  Warren  Linoline,  etc.,  Works  and  Trustee,  168  Mass.  364  (1897). 


PARTNERSHIP   ASSOCIATIONS  ^ic^ 

§  450.     Syndicates  and  Joint  Adventures 

A  syndicate  is  defined  as  an  association  of  individuals 
formed  for  the  purpose  of  conducting  and  carrying  out  some 
particular  business  transaction,  ordinarily  of  a  financial  char- 
acter, in  which  the  members  are  mutually  interested.  It  is  as 
respecting  the  persons  composing  it  a  partnership,  and  the  legal 
obligations  assumed  by  the  members  are,  as  between  them- 
selves, substantially  the  same  as  those  of  an  ordinary  part- 
nership.^^ 

A  joint  adventure  is  simply  a  partnership  limited  in  scope 
and  duration  by  the  fact  that  it  applies  to  but  a  single  business 
transaction.  The  liability  of  the  co-adventurers  is  equal,  and 
as  to  third  parties  is  entirely  independent  of  the  amount  ad- 
vanced. The  members  of  such  a  partnership  may,  of  course, 
make  any  agreement  between  themselves  they  choose  as  to 
their  respective  investments,  interests,  and  liabilities,  but  this 
'does  not  affect  their  liability  to  third  parties. 

The  members  of  a  syndicate  would  undoubtedly  be  held 
liable  to  third  parties  as  partners  if  the  enterprise  became  ab- 
solutely insolvent.  As  most  syndicates  are  formed  for  finan- 
cial investments  or  underwritings,  and  either  involve  no  obli- 
gations in  excess  of  the  amounts  contributed,  or,  if  otherwise, 
have  well-defined  and  well-understood  liability  as  to  the  syndi- 
cate transactions,  and  as  the  members  of  such  syndicates  are 
usually  men  or  concerns  of  wealth  and  standing,  the  question 
of  partnership  liability  rarely  arises.  If  there  were  any  danger 
of  such  liability  it  could  probably  be  avoided  by  organization 
under  a  declaration  of  trust  with  express  exclusion  of  indi- 
vidual liability. 


"S'z   Cyc,  p.  661;  Hambleton  v.  Rhind,  84  Md.  456  (18971);  Hossack  v.  Ottawa  De- 
velopment Assn.,  244  111.  274  (1910). 


CHAPTER   LIX 
ASSOCIATIONS   UNDER   DEEDS   OF  TRUST 

§451.     Introductory 

In  a  leading  case  in  Massachusetts,^  the  court  stated: 
"There  is  no  intermediate  form  of  organization  between  a 
corporation  and  a  partnership  like  the  joint-stock  companies 
of  England  and  of  some  of  the  United  States,  known  to  the 
laws  of  this  Commonwealth.  Since  this  association  is  not  a 
corporation,  its  members  must  be  partners." 

As  a  matter  of  fact,  since  this  statement  was  made  Massa- 
chusetts has  evolved  an  intermediate  form  of  organization  in 
the  shape  of  its  so-called  "voluntary  associations"  which  have 
been  judicially  defined  as  "business  partnerships  organized 
in  the  form  of  a  trust."  These  associations  have  transferable 
shares  and  their  shareholders  avoid  partnership  liability.  They 
certainly  are  not  corporations,  and  they  are  not  partnerships 
if  the  word  is  given  its  present  legal  definition. 

The  legislature '  of  Massachusetts  has  recognized  these 
associations  by  requiring  them  to  file  reports  and  by  appoint- 
ing a  commission  to  investigate  them  and  report  as  to  what, 
if  any,  legislative  action  should  be  taken  to  regulate  them. 
The  Supreme  Court  of  the  United  States  has  held  that  they 
are  not  required  to  report  nor  to  pay  taxes  under  the  new 
Federal  Corporation  Tax  Law^  and  it  is  possible  that  they  may 
evolve  into  a  widely  used  form  of  business  association. 

§  452.     Express  Trusts 

Various  experiments  have  been  tried  at  diflferent  times  to 
form  a  permanent  business  organization  in  which  trustees  own 

1  Ricker  v.   Am.   Loan  and  Trust  Co.,   14a  Mass.  ^,  348  (1885). 
'Eliot  V.   Freeman,  220  U.   S.    178  (1911). 

520 


ASSOCIATIONS   UNDER  DEEDS   OF  TRUST  52 1 

and  manage  the  business,  and  those  interested  are  cestuis  que 
trust.  In  the  case  of  Cox  v.  Hickman,  8  H.  of  L.  Cases  268 
(i860)  the  highest  authority  in  England  decided  that  no  part- 
nership liability  arises  in  cases  where  property  is  placed  in 
the  hands  of  trustees  to  manage  for  beneficiaries.  This  case 
has  been  followed  in  most  of  the  states  of  this  country 
to  the  extent  of  modifying  the  harsh  rule  that  the  sharing  of 
profits  is  conclusive  to  establish  partnership  liability.  It  has 
not  been  followed  as  yet  to  the  extent  of  introducing  a  new 
form  of  business  organization. 

The  circumstances  of  Cox  v.  Hickman  were  as  follows: 
The  firm  of  B.  Smith  &  Co.,  being  financially  embarrassed, 
entered  into  an  arrangement  with  its  creditors  by  which  the 
business  was  thenceforth  to  be  carried  on  by  trustees  under 
the  name  of  the  "Stanton  Iron  Company"  and  the  creditors 
were  to  be  paid  out  of  the  net  income.  A  majority  in  value 
of  the  creditors  were  to  make  such  rules  as  might  be  necessary 
for  the  conduct  of  the  business,  and  were  to  discontinue  it  if 
they  deemed  it  best.  In  conducting  the  business  under  this 
form,  indebtedness  was  incurred  to  one  Hickman  and  his 
draft  was  accepted  in  the  name  of  the  "Stanton  Iron  Com- 
pany" by  one  of  the  trustees.  Later,  the  Stanton  Iron  Com- 
pany being  unable  to  meet  its  obligations,  it  was  sought  to  hold 
Cox — one  of  the  original  creditors  of  Smith  &  Co. — liable  as 
a  partner  for  the  debts  of  the  Stanton  Iron  Company,  and 
on  this  contention  the  case  was  carried  up  to  the  House  of 
Lords.  Here  the  judges  held  that  the  relation  of  principal 
and  agent  did  not  exist  between  the  creditors  of  Smith  &  Co. 
and  the  trustees  who  were  operating  the  Stanton  Iron  Com- 
pany, and  that  these  creditors  were  not  liable  as  partners  for 
the  debts  of  the  Iron  Company. 

In  England,  Cox  v.  Hickman  was  followed  by  the  case  of 
Smith  V.  Anderson,  L.  R.  15,  Ch.  D.  247,  284  (1879),  ^^ 
which  the  organization  was  from  the  first  in  the  form  of  an 


522 


ALLIED    FORMS    OF   ORGANIZATION 


express  trust.  The  court  said:  **The  trustees  here  are  the  only 
persons  who  are  dealing  with  the  investments,  and  they  are 
dealing  not  as  agents  for  some  principal,  but  as  trustees  in 
whom  the  property  and  the  management  of  it  are  vested,  and 
who  have  the  power  of  changing  the  investments  and  securi- 
ties. That  is  just  like  the  case  which  often  occurs  where 
executors  or  trustees  of  a  will  are  directed  to  carry  on  a  busi- 
ness. The  fact  that  they  are  to  account  to  others  for  the 
profits  made  is  a  matter  utterly  immaterial  as  between  them 
and  those  with  whom  they  deal." 

In  the  United  States  the  same  doctrine  has  been  held  in 
many  cases. ^  These  are  all  cases  of  express  trusts  and  come 
under  the  usual  rules  governing  trustees;  i.e.,  the  trustees 
are  personally  liable  on  their  contracts  unless  there  is  a  special 
agreement  that  only  the  trust  property  shall  be  held  liable.* 
They  deal  as  principals,  not  as  agents,  and  they  have  full  title 
to  and  control  of  the  property  and  act  and  sue  and  are  sued  in 
their  own  names  as  trustees.  As  stated  by  a  recent  writer:^ 
*'Debts  incurred  under  the  trust  are  but  the  personal  debts  of 
the  trustees,  who  are  not  agents,  but  are  the  absolute  owners 
and  principals.  The  trustees  have  to  account  of  course  to  the 
beneficiaries,  but  the  beneficiaries  have  no  partnership  pow- 
ers." 

The  same  writer  says  further:  "Express  trusts,  whether 
created  under  wills,  deeds  of  settlement,  assignments  for  the 
benefit  of  creditors,  receiverships,  or  by  special  declarations 
of  trust  to  manage  property  or  carry  on  business,  are  neither 
corporations  nor  joint-stock  companies  nor  partnerships,  but 
they  employ  a  distinct  and  the  highest  known  method  of 
administration." 


'  Hart  V.  Seymour,  14.7  111.  508  (1893) ;  Mallory  v.  Russell,  71  Towa  63  (1887) ; 
Mason  v.  Pomeroy,  191  Mass  164  (1890);  Mayo  v.  Moritz,  15,1  Mass.  481.  (1890); 
Johnson  v.  Lewis,  6  Fed.  27.  (1881);  Taylor  v.  Davis,  no  U.  S.  3.30  (i884>;  Lackett 
V.  Rumbaugh,  45  Fed.  23-29  (1891);  Wells-Stone  Mercantile  Co.  v.  Grover,  7  N.  D 
460  (1898);  41  L.  R  A.  252;  Spotswood  v.  Morris,  12  Idaho  360  (1906);  s.  c-,  6  L.  R. 
A.  (N.  S.)  66= 


*  Perry  on  Trusts,  p.  437a. 

*  Chanler  on  Express  Trusts. 


ASSOCIATIONS   UNDER   DEEDS   OF  TRUST  523 

The  express  trust  has  incurred  a  certain  amount  of  odium 
because  it  was  the  form  under  which  the  large  industrial  com- 
binations were  brought  into  being,  so  that  the  word  "trust" 
came  to  have  a  new  and  unpopular  signification.  "The  Stand- 
ard Oil  Trust,"  "The  Sugar  Trust,"  and  "The  Bay  State  Gas 
Company"  were  each  organized  as  an  express  trust,  in  which 
a  board  of  trustees  took  over  the  stocks  of  the  constituent 
companies  and  issued  trust  certificates  to  the  owners.  There- 
after, until  the  courts  declared  such  organizations  illegal,  these 
boards  of  trustees  dominated  their  respective  industries.  The 
courts  decided  that  trusts  of  this  nature  were  illegal,  not  be- 
cause of  any  objection  to  their  form  of  organization,  but  be- 
cause their  objects  were  illegal. 

When  the  trust  form  was  forbidden  to  these  monopolies, 
holding  corporations  or  large  owning  corporations  were 
resorted  to,  but  the  name  "trust"  persisted  and  is  still  used  to 
designate  the  great  monopolistic  corporations.  This  is  as 
illogical  as  it  would  be  to  call  large  partnerships  "corpora- 
tions," and  has  accordingly  resulted  in  much  confusion  of  pop- 
ular thought  and  judgment.  The  word  "trust"  has  been  de- 
based to  an  unpopular  and  incorrect  significance. 

§  453-     Voluntary  Associations  in  Massachusetts 

In  Massachusetts  business  organizations  under  deed  or 
declaration  of  trust  have  become  numerous  under  the  title 
of  "voluntary  associations."  They  are  similar  in  their  general 
form  to  the  express  trust,  though  the  courts  of  Massachusetts 
have  refused  to  recognize  them  as  such.  Their  development 
is  largely  due  to  the  fact  that  prior  to  19 12  the  laws  of 
Massachusetts  made  no  provision  for  corporations  to  deal  in 
and  develop  real  estate.  A  form  of  business  organization  that 
could  engage  in  such  undertakings  without  involving  its  mem- 
bership in  the  onerous  liabilities  of  a  partnership  was  needed, 
and  the  development  of  the  voluntary  association  followed. 


5^4  ALLIED   fORMS   01^  ORGANISATION 

The  real  estate  trusts  of  Boston  now  own  not  less  than  $250,- 
000,000  in  real  property. 

The  voluntary  association  proved  so  satisfactory  for  real 
estate  purposes  that  it  has  been  extended  to  a  limited  degree 
into  manufacturing,  mercantile,  and  other  lines  of  activity, 
and  it  may  become  a  popular  form  of  business  organization. 

The  characteristic  features  of  these  voluntary  associations 
are  as  follows: 

1.  A  deed  or  declaration  of  trust,  drawn  up  to  define  the 

rights  and  powers  of  trustees  and  shareholders. 

2.  Two  or  more  trustees  who  are  authorized  to  take  over 

and  manage  the  capital,  business,  or  other  property 
supplied  by  the  shareholders. 

3.  Shareholders    who    receive    transferable    certificates 

representing  their  respective  interests  in  the  profits 
and  in  the  property  on  dissolution. 

4.  Provisions    for   division  of   profits,   appointment   of 

trustees  to  fill  vacancies,  and  for  dissolution  at  ter- 
mination of  the  trust. 

It  is  usual  to  provide  in  the  deed  of  trust  that  no  liability 
is  to  attach  to  the  shareholders  or  trustees. 

§  454.     Nature  of  the  Voluntary  Association 

The  voluntary  association  of  Massachusetts  first  came  up 
for  judicial  cognizance  in  the  case  of  Hoadley  v.  County 
Commissioners,  105  Mass.  519,  526  (1870).  In  this  case 
the  court  said:  "The  McKay  Sewing  Machine  Association  is 
not  a  corporation.  It  has  never  received  an  act  of  incorpora- 
tion, nor  been  organized  as  a  corporation  under  the  general 
laws.  A  corporation  can  be  created  and  exist  only  by  sanction 
of  the  Legislature.  This  is  a  voluntary  association  of  individu- 
als, and  its  articles  of  agreement,  although  they  adopt  some 
of  the  forms  of  managing  the  business  usual  in  corporations, 


ASSOCIATIONS   UNDER  DEEDS   OF  TRUST  525 

constitute  a  copartnership.  It  cannot  sue  and  be  sued  as  a 
corporation ;  its  members  are  individually  liable  for  its  debts ; 
and  it  has  none  of  the  special  attributes  which  belong  to  a 
corporation  duly  organized  under  our  laws.  .  .  .  The  provi- 
sion that  each  member  may  sell  and  transfer  his  interest,  and 
thus  introduce  a  new  partner,  though  unusual,  is  not  incon- 
sistent with  the  contract  of  copartnership."  The  decision 
gives  a  synopsis  of  the  articles  of  the  deed  of  trust. 

The  same  organization  came  up  again  in  Gleason  v.  Mc- 
Kay, 134  Mass.  419  (1883),  when  the  court  decided  that 
the  association  was  a  partnership  and  not  a  corporation,  and 
that  a  statute  taxing  its  shares  was  unconstitutional. 

In  most  of  the  other  cases  in  which  this  form  of  organ- 
ization has  come  before  the  Massachusetts  courts,  it  has  been 
held  that  the  voluntary  association  is  "a  business  partnership 
organized  in  the  form  of  a  trust. "^  This  is  ambiguous  and 
unsatisfactory  as  a  legal  definition. 

When  the  New  England  Car  Trust  came  before  the  court^ 
it  was  held  that — "The  Car  Trust  was  not  a  corporation.  It 
was  a  mere  voluntary  association.  There  is  no  intermediate 
form  of  organization  between  a  corporation  and  a  partner- 
ship like  the  joint-stock  companies  of  England  and  of  some  of 
the  United  States,  known  to  the  laws  of  this  Commonwealth. 
Since  this  association  is  not  a  corporation,  its  members  must 
be  partners." 

Generally  it  is  held  that,  "There  is  nothing  inconsistent 
with  an  association  being  a  partnership,  that  it  has  shares, 
or  that  the  shares  are  transferable,  or  that  the  death  of  a  mem- 
ber shall  not  work  a  dissolution."  This  doctrine  has  been 
affirmed  many  times.^ 


•  Taber  v.  Breck.  102  Mass.  355  (1906) ;  Phillips  v,  Blatchford,  137  Mass.  510 
(1884));   Williams  v.    Boston,   208  Mass.   497    (191 1). 

'  Ricker  v.    American   Loan    &   Trust   Co..    140  Mass.   346,   348   (1885). 

8  Edwards  v.  Warren  LinoHne,  etc.,  Works  and  Trustee,  168  Mass.  564.,  567  (1897); 
Merchants'  Nat.  Bank  v.  Wehrmann,  202  U.  S.  295  (1906) ;  Phillips  v.  Blatchford, 
137  Mass.  510  (188+) ;  Tabor  v.  Breck,  1912  Mass.  355  (1906). 


526  ALLIED    FORMS    OF   ORGANIZATION 

In  other  cases  it  has  been  decided  that  such  a  trust  does 
not  create  a  perpetuity,  even  when  deaHng  with  land,  and  is 
not  an  illegal  restraint  on  alienation.^ 

The  instrument  creating  these  so-called  voluntary  asso- 
ciations is  termed  an  indenture  of  trust,  or  declaration  of 
trust/® 

§  455.     Liability  Under  the  Voluntary  Association 

The  following  clause,  or  an  equivalent,  is  commonly  used 
in  the  declaration  of  trust  by  which  voluntary  associations 
are  brought  into  being  to  prevent  any  possibility  of  liability 
attaching  to  the  trustees  or  shareholders : 

"In  every  written  order,  contract,  or  obligation  which  a 
trustee  shall  give  or  enter  into,  it  shall  be  the  duty  of  the 
trustee  to  stipulate  that  neither  the  trustee  nor  the  share- 
holders shall  be  held  to  any  liability  under  or  by  reason  of 
such  order,  contract,  or  obligation." 

While  the  Massachusetts  courts  have  usually  refused  to 
consider  voluntary  associations  as  express  trusts,  holding  them 
"business  partnerships  organized  in  the  form  of  a  trust,"  they 
nevertheless  seem  to  consider  that  they  have  effectually 
avoided  partnership  liability  for  their  shareholders  in  all  cases 
where  the  declaration  of  trust  expressly  disclaims  such  lia- 
bility. 

In  Hussey  v.  Arnold,  185  Mass.  202  (1904),  the  court 
discussed  "The  Boston  Associates"  organized  under  a  deed  of 
trust  to  deal  in  certain  real  property.  The  deed  of  trust  pro- 
vided for  three  trustees  who  were  to  conduct  the  business  and 
hold  the  property.  These  trustees  could  be  removed  at  any 
time  and  the  trust  be  terminated  by  a  three-fourths  vote  (in 
value)  of  the  shareholders,  but  otherwise  it  was  to  last  twenty 


■>  Howe  V.  Morse,  174  Mass.  491  (1899) ;  Hart  v.  Seymour,  147  HI.  598  (1893) ; 
Mallory  v.   Russell,  7.1   Iowa  63  (1887).  ,    .      „ 

i»  A  form  of  declaration  of  trust  will  be  found  m  Howe  v.  Morse,  174  Mass. 
491    (1899). 


ASSOCIATIONS   UNDER   DEEDS   OF  TRUST 


527 


years  after  the  death  of  the  last  subscriber.  Shares  were 
$100  each  and  were  transferable.  Subscribers  were  liable  for 
their  subscriptions  but  were  relieved  from  further  liability 
by  .the  following  provision : 

"All  contracts  and  engagements  entered  into  by  the  trus- 
tees shall  be  in  their  names  as  trustees,  and  shall  provide 
against  any  personal  liability  on  the  part  of  the  trustees,  and 
shall  stipulate  that  no  other  property  shall  be  answerable 
than  the  property  in  the  hands  of  the  trustees." 

The  association  became  insolvent  and  suit  was  brought 
for  coal  furnished.  Commenting  on  the  provisions  of  the  deed 
of  trust  the  court  said : 

"The  agreement  creating  the  trust  has  peculiar  provi- 
sions. The  object  of  it,  apparently,  was  to  obtain  for  the  asso- 
ciates most  of  the  advantages  belonging  to  corporations,  with- 
out the  authority  of  any  legislative  act,  and  with  freedom  from 
the  restrictions  and  regulations  imposed  upon  corporations. 
....  We  have  already  said  that  the  subscribers  were  not  to 
be  liable  to  third  persons,  and  it  would  seem  therefore  that  the 
business  of  the  trust  was  intended  to  be  done  in  a  way  that 
would  give  no  one  dealing  with  it  a  right  to  bring  action  at 
law  against  anybody  to  enforce  any  contract  or  liability  of 
the  association." 

As  will  be  seen  from  the  preceding  quotation,  the  judge's 
comments  were  cautious  and  non-committal.  It  was  held, 
however,  that  the  trustees  were  not  liable  personally  in  the 
action  for  coal  furnished,  and  "as  agents  and  trustees  under 
the  agreement  they  were  not  authorized  to  contract  any  debt 
which  should  charge  the  certificate  holders." 

In  Shoe  and  Leather  Bank  v.  Dix,  123  Mass.  148  (1877), 
the  court  held  that  the  trustees  who  had  signed  a  note  "We, 
as  trustees  and  not  individually,  promise  to  pay,  etc."  could  not 
be  held  personally  liable. 

In  Williams  v.  Boston,  208  Mass.  497  (1911),  the  court 


528 


ALLIED   FORMS   OF   ORGANIZATION 


held  that,  if  the  relations  of  the  shareholders  to  the  trustees 
was  that  of  cestuis  que  trust,  the  interest  of  each  in  the  trust 
would  be  taxable  where  he  lived,  instead  of  in  the  City  of 
Boston,  where  the  business  was  situated,  and  hence  there  were 
reasons  of  policy  why  the  members  should  be  held  to  be  part- 
ners for  purpose  of  taxation — a  frank  but  somewhat  unusual 
basis  for  a  judicial  decision  on  an  important  matter. 

In  Mayo  v.  Moritz,  151  Mass.  481,  484  (1890),  the 
court  had  before  it  a  transfer  under  a  deed  of  trust  of  certain 
patent  rights  to  trustees  with  provision  for  the  sale  of  scrip  to 
raise  money  to  exploit  the  rights.  The  trustee  under  the 
name  of  the  Loeber  Pneumatic  Engine  Co.  rented  premises 
in  Boston.  The  landlord  attempted  to  hold  the  scrip-holders 
hable.  The  court  said:  "The  deed  of  trust  does  not  have 
the  effect  to  make  the  scrip-holders  partners.  It  does  not  con- 
template the  carrying  on  of  a  partnership  business  upon  the 
joint  account  of  the  grantor  and  the  scrip-holders.  .  .  . 
The  scrip-holders  are  cestuis  que  trust,  and  are  entitled  to  their 
share  of  the  avails  of  the  property  when  the  same  is  sold. 
.  .  .  If  the  trustees  contracted  a  debt  to  the  plaintiff, 
they  are  liable  for  it  personally,  and  an  action  at  law  may 
be  maintained  by  him  against  them." 

In  this  case,  it  will  be  seen  that  the  court  decided  accord- 
ing to  the  English  doctrine  that  such  an  association  is  not  a 
partnership  but  an  express  trust. 

It  is  to  be  noted  in  the  first  cases  involving  the  status  of 
members  of  voluntary  associations  that,  where  the  trust  in- 
strument contained  no  provision  relieving  the  shareholders 
from  liability,  the  courts  held  the  members  liable  as  partners.^^ 
In  the  later  cases,  the  declaration  of  trust  usually  provided 
that  the  shareholders  were  not  to  be  liable,  and  the  courts  took 
it  for  granted  that  in  the  face  of  this  express  provision  they 
could  not  be  bound.    On  the  other  hand,  in  the  case  of  Mayo 


"  Hoadley  v.   County  Commissioners,  105  Mass.  519  (1870). 


ASSOCIATIONS   UNDER  DEEDS   OF  TRUST  529 

V.  Moritz,  already  cited,  the  court  held  it  to  be  an  express 
trust,  and  decided  on  that  account  that  the  scrip-holders  were 
not  liable. 

The  question  whether  an  express  trust  can  be  created  to 
carry  on  an  industrial  or  mercantile  enterprise  in  Massachu- 
setts, in  which  the  shareholders  would  be  cestiiis  que  trust  and 
hence  not  liable  as  partners,  cannot  be  answered  in  the  affirma- 
tive from  the  decisions  of  the  courts. 

§  456.     Regulation  of  Voluntary  Associations 

Within  the  last  few  years  voluntary  associations  have  at- 
tracted much  attention  in  Massachusetts  and  have  been  the 
subject  of  several  legislative  acts. 

In  1907  it  was  provided  that  such  an  association  must 
file  the  names  of  its  trustees  and  a  reference  to  the  instrument 
or  declaration  of  trust  under  which  it  did,  or  was  to  do,  busi- 
ness, in  the  office  of  the  clerk  of  the  city  or  town  in  which  its 
place  of  business  or  offices  were  situated.^^ 

In  1909  it  was  provided  that,  ^'Trustees  of  a  voluntary 
association  under  a  written  instrument  or  declaration  of  trust 
the  beneficial  interest  under  which  is  divided  into  transfer- 
able certificates  of  participation  or  shares,  shall  file  a  copy  of 
such  written  instrument  or  declaration  of  trust  with  commis- 
sioner of  corporations  and  with  clerk  of  every  city  or  town  in 
which  such  association  has  a  place  of  business."  ^^ 

The  Massachusetts  Legislature  in  19 11  directed  the  Com- 
missioner of  Corporations  to  investigate  the  growth  of 
these  voluntary  organizations  and  to  report  to  the  Legislature. 
In  his  report  submitted  January  17,  191 2,  the  Commissioner 
said: 

"The  characteristics  assumed  by  these  associations  which, 
it  is  commonly  said,  resemble  the  attributes  of  a  corporation 


"  Acts  1907,  Ch.  539. 
**  Acts  1909,  Ch.  441. 


530  ALLIED   FORMS   OF   ORGANIZATION 

are  the  following.     They  are  to  be  found  in  all  the  more  re- 
cent forms  of  instruments  creating  these  associations. 

1.  Transferability  of  shares. 

(a)  Without    effecting    the    dissolution    of    the 

organization. 

(b)  Without  giving  the  shareholders  the  right  to 

an  accounting. 

(c)  Without  giving  the  shareholders  any  right  or 

interest  in  the  property  of  the  concern. 

2.  The  limited  liability  of  the  shareholder  for  the  debts 

of  the  concern. 

The  transferable  nature  of  these  shares  gives  to  these  as- 
sociations a  continuity  of  duration  usually  limited  by  ex- 
press provisions  to  the  lives  of  the  subscribers  and  twenty 
years  thereafter.  This  provision  differentiates  the  form  of  as- 
sociation from  an  ordinary  partnership,  where  the  death  of  a 
partner  dissolves  the  partnership  j^nd  makes  it,  to  a  limited 
extent,  similar  to  a  corporation  which  may  or  may  not  have 
perpetual  duration." 

The  report  also  states  in  further  characterization  of  the 
voluntary  association  that  a  shareholder  has  no  right  to  an 
accounting,  as  in  a  partnership,  nor  any  right  to  examine  the 
books  as  in  a  corporation;  that  a  shareholder  is  not  a  tenant 
in  common  and  has  no  interest  in  the  property  of  the  trust; 
that  a  shareholder  is  not  responsible  for  the  debts  of  the  asso- 
ciation ;  and  that  a  provision  is  frequently  inserted  to  be  made 
part  of  every  contract  that  neither  shareholders  nor  trustees 
are  to  be  liable. 

§  457.     Liability  to  Taxation 

In  Gleason  v.  McKay,  134  Mass.  419  (1893),  it  was  de- 
cided that  a  statute  attempting  to  tax  the  transferable  shares  of 
voluntary  associations  was  unconstitutional.     In  a  later  case, 


ASSOCIATIONS   UNDER   DEEDS   OF  TRUST  531 

commenting  upon  this  decision  the  court  said:  **As  the  tax 
considered  in  Gleason  v.  McKay  was  not  upon  a  business  or 
employment,  and  as  there  was  no  franchise  or  privilege  con- 
ferred by  the  Legislature,  the  distinction  between  partnerships 
with  transferable  shares  and  those  without  rendered  the  tax 
unequal  and  unreasonable,  because  it  was  a  discrimination 
founded  upon  an  immaterial  fact/'^^ 

In  Massachusetts  the  Legislature  can  call  upon  the  jus- 
tices of  the  highest  court  to  give  their  opinion  as  to  the  power 
of  the  Legislature  to  enact  proposed  legislation.  Pursuant  to 
inquiry  made  of  them  the  justices  submitted  a  report — found 
in  196  Mass.  603-627 — covering  a  number  of  matters  of  more 
or  less  importance.  One  of  the  questions  propounded  involved 
the  taxability  under  the  Massachusetts  Constitution  of  shares 
in  these  voluntary  associations.  Four  of  the  justices  deemed 
such  shares  taxable  and  three  were  of  the  contrary  opinion. 

In  the  Massachusetts  Income  Tax  Law  enacted  in  19 16, 
the  Legislature  has  tried  to  equalize  the  taxation  somewhat. 
Under  this  law  dividends  of  national  banks  and  corporations, 
foreign  as  well  as  domestic,  paying  a  franchise  tax  in  Massa- 
chusetts are  exempted  from  the  tax,  and  the  income  of  corpo- 
rations is  not  taxable.  On  the  other  hand,  dividends  or  shares 
in  associations  and  trusts  having  transferable  shares  are  tax- 
able, except  in  certain  cases  where  the  income  of  the  associa- 
tion in  trust  would  be  exempt  if  received  by  an  individual,  or 
where  the  trustees  or  managers  agree  to  pay  the  tax.  Where 
the  dividends  on  transferable  shares  are  not  taxable,  the  in- 
come of  associations  or  trusts  is  taxable  if  derived  from  an- 
nuities, professions,  employments,  trade,  or  business.  The 
transfer  of  shares  in  associations  having  transferable  shares 
is  made  taxable  by  the  Massachusetts  Stock  Transfer  Tax 
Law. 

When  the  Federal  Corporation  Tax  was  enacted,  it  was 


A4Mijiot  V.  Winthrop,  162  Mass.   113,  122  (1894). 


532 


ALLIED   FORMS   OF   ORGANIZATION 


sought  to  tax  voluntary  associations.  The  cases  were  carried 
before  the  Supreme  Court,  and,  in  deciding  against  the  power 
of  the  government  to  impose  the  tax.  Justice  Day  said: 

"Entertaining  the  view  that  it  was  the  intention  of  Con- 
gress to  embrace  within  the  corporation  tax  statute  only  such 
corporations  and  joint-stock  associations  as  are  organized  un- 
der some  statute  or  derive  from  that  source  some  quality  or 
benefit  not  existing  at  the  common  law,  we  are  of  opinion  that 
the  real  estate  trusts  involved  in  these  two  cases  are  not  within 
the  act."^' 

§  458.     Advantages  of  the  Voluntary  Association 

The  Commissioner  of  Corporations  of  Massachusetts  in 
closing  his  report  summarizes  the  advantages  afforded  by  these 
voluntary  associations  as  follows:^® 

1.  The  experience  of  twenty-five  years  shows  that  they 
furnish  a  convenient,  safe,  and  unobjectionable  form  of  co-op- 
eration, ownership,  and  management. 

2.  Their  form  of  management  is  more  flexible,  more 
economical,  and  more  convenient  than  that  of  a  corporation. 
Trustees  can  do  business  with  more  ease  and  rapidity  than  a 
board  of  directors. 

3.  In  particular  they  afford  a  convenient  form  for  com- 
bining capital  for  the  development  and  improvement  of  real 
estate,  as  the  form  of  organization  insures  a  continuity  of 
management  and  control  that  specially  appeals  to  investors 
in  real  estate,  and  which  cannot  be  secured  by  a  corporation 
on  account  of  the  change  of  ofBcers  each  year.  Trustees  are 
not  changed  as  frequently  as  are  directors  of  a  corporation. 

The  Commissioner  stated  that  where  such  associations 
sought  capital  in  the  open  market  they  should  be  subjected  to 
the  same  publicity  requirements  as  corporations. 


1°  Eliot  V.  Freeman,  220  U.  S.  178  (1911).  See  Sears  on  Effective  Substitutes 
for   Incorporation,   1911. 

"  Report  of  Massachusetts  Tax  Commissioners  upon  Voluntary  Associations,  Jan- 
uary 17,  iyi2. 


CHAPTER    LX 

PLAN   FOR   STOCK   PARTNERSHIP 

§  459.     A  Suggested  Form  of  Partnership 

A  partnership  has  certain  quahties  of  effectiveness  which 
under  some  circumstances  make  it  superior  to  every  other 
form  of  business  organization.  During  the  investigation  of 
the  Steel  Trust,  Mr.  Carnegie  made  the  following  statement: 

"I  don't  believe  that  any  corporation  can  manage  a  busi- 
ness like  a  partnership.  When  we  were  partners  I  felt  that  we 
could  run  around  corporations.  You  take  thirty-five  young 
men  interested  in  watching  even  a  leak  in  a  spigot,  and  no  cor- 
poration can  compete  with  such  an  organization  in  any  busi- 
ness." 

It  would  seem  that  if  a  form  of  organization  could  be  de- 
vised that  in  ordinary  business  would  combine  the  desirable 
features  of  both  the  corporation  and  the  partnership,  it  would 
be  more  efficient  than  either.  In  any  business  organization 
there  are  two  elements  of  management  and  investment,  but 
the  relations  to  the  business  of  those  who  furnish  the  capital 
and  those  who  direct  the  business  are  absolutely  different. 

Those  who  have  the  control  and  direction  of  an  enterprise 
should  not  object  to  the  element  of  partnership  responsibility. 
Those  who  merely  invest  the  capital  should  not  be  required  to 
assume  any  liability  beyond  the  amount  they  invest. 

If  directors  in  corporations  were  required  to  take  the  risk 
of  partners  in  ordinary  businesses,  it  would  at  one  stroke  re- 
move the  most  objectionable  features  of  present  corporate 
management.  Directors  would  really  direct,  and  would  not 
dare  to  lend  their  names  where  they  could  not  also  give  their 
personal  oversight  and  business  ability. 

533 


534 


ALLIED   FORMS   OF   ORGANIZATION 


The  same  end  might  be  attained  if  it  were  so  arranged 
that  investors  could  put  money  into  partnership  enterprise, 
and,  while  risking  their  investment,  assume  no  partnership  lia- 
bility. It  is  hardly  to  be  doubted  that  under  existing  laws  it 
is  possible  to  devise  such  an  organization  in  which  the  actual 
managers  will  be  partners  and  subject  to  partnership  responsi- 
bility, while  those  who  merely  furnish  the  capital  and  do  not 
manage  may  participate  in  profits  without  participating  in 
partnership  liability.  Under  such  conditions  these  investors 
would  be  safer  and  better  protected  than  is  the  stockholder  of 
the  ordinary  corporation. 

§  460.     Plan  for  Suggested  Form  of  Partnership 

The  following  suggested  organization  provides  for  a  man- 
aging partnership  body  issuing  profit-sharing  debentures  for 
sale  to  investors: 

I.  As  to  the  Managing  Partners:  An  ordinary  partner- 
ship may  be  formed  as  the  basis  of  the  organization,  in  which 
the  managers  of  the  business  enter  into  the  usual  partnership 
relations.  If  it  is  desirable,  this  basic  partnership  could  be 
organized  with  transferable  shares,  as  is  done  in  the  usual 
joint-stock  company.  It  is  well  established  that  a  partnership 
with  transferable  shares  to  represent  the  partners'  interests  is 
legal,  and  the  arrangement  secures  one  of  the  most  popular 
features  of  the  corporate  form.  "The  provision  that  each 
member  may  sell  and  transfer  his  interest,  and  thus  introduce  a 
new  partner,  though  unusual,  is  not  inconsistent  with  the  con- 
tract of  partnership."^  ''There  is  nothing  inconsistent  with 
an  association  being  a  partnership  that  it  has  shares,  or  that 
the  shares  are  transferable,  or  that  the  death  of  a  member  shall 
not  work  a  dissolution."^ 


^  Hoadley  v.  Co.  Commissioners,  105  Mass.  519  (1870) ;  Bank  v.  Dean,  124  Mass. 
81   (1878);  Carter  v.   McClure,  98  Tenn.   109  (1897). 

'Edwards  v.  Warren  Linoline,  etc..  Works,  168  Mass.  564  (18971);  Taber  v. 
Breck,  192  Mass.  355  (1906) ;  Phillips  v.  Blatchford,  1371  Mass.  510  (188141) ;  Merchants' 
Nat.  Bank  v.  Wehrman,  202  U.   S.  295  (1906),  and  authorities  cited  in  this  last  case. 


PLAN    FOR   STOCK   PARTNERSHIP  ^35 

Partnership  liability  is  not  avoided  by  the  introduction  of 
transferable  shares  into  the  partnership,  but  for  active  mem- 
bers, personally  engaged  in  the  business  and  able  to  watch 
their  several  interests,  this  feature  should  not  be  objectionable. 
On  the  other  hand,  the  existence  of  this  liability  is  of  much 
advantage  to  the  public  and  to  those  who  are  investors  but  not 
partners  in  the  business. 

2.  Provisions  for  Investors.  The  smaller  investors  who 
furnish  the  money  for  business  enterprises  usually  cannot  or 
do  not  care  to  trouble  themselves  with  the  management.  Such 
investors  should  not  be  required  to  take  a  partnership  risk 
when  their  sole  function  is  to  furnish  capital.  Usually  invest- 
ors of  this  class  prefer  corporate  stocks  and  bonds  as  the 
safest  and  most  convenient  form  of  investment  open  to  them. 
An  equally  safe  and  convenient  partnership  security,  if  free 
from  partnership  liability,  would  appeal  to  them  more 
strongly.  If,  then,  a  partnership  were  organized  along  the 
lines  suggested,  with  the  active  partners  taking  the  partnership 
responsibility,  and  when  this  was  done  debentures  were  issued 
in  sums  of  $100  or  some  multiple  of  $100,  these  debentures 
drawing  interest  and  participating  in  profits,  an  exceptionally 
attractive  investment  offering  would  be  the  result.  The  pur- 
chasers of  such  securities  would  have  no  voice  or  part  in  the 
management  of  the  partnership  business,  but  would  likewise 
have  no  liability  for  the  partnership  obligations.  So  far  from 
being  members  of  the  firm,  or  partners  in  the  business,  they 
would  be  creditors.  In  event  of  insolvency,  their  position 
would  be  better  than  that  of  stockholders  in  a  corporation. 

There  is  apparently  no  legal  obstacle  in  the  way  of  the  is- 
suance of  such  participating  debentures.  It  has  been  decided 
many  times  that  an  agreement  to  give  a  share  of  the  profits 
as  compensation  for  the  loan  of  money  does  not  make  the  cred- 
itor a  partner  or  liable  to  other  creditors  of  the  firm.^ 


«  See  18  L.  R.  A.  (N.  S.)  963.,  note  and  cases  there  cited. 


536  ALLIED   FORMS   OF  ORGANIZATION 

In  Hackett  v.  Stanley,  115  N.  Y.  625,  629  (1889),  the 
court  said:  "We  think  that  the  division  of  profits  must  still  be 
considered  the  most  important  element  in  all  contracts  by 
which  the  true  relation  of  parties  to  a  business  is  to  be  deter- 
mined. .  .  .  Exceptions  to  the  rule  are,  however,  found  in 
cases  where  a  share  of  profits  is  contracted  to  be  paid,  as  a 
measure  of  compensation  to  employees  for  services  rendered 
in  the  business,  or  for  the  use  of  moneys  loaned  in  aid  of  the 
enterprise,  ...  It  cannot  be  disputed  but  that  a  loan  may  be 
made  to  a  partnership  firm  on  conditions  by  which  the  lenders 
may  secure  a  limited  or  qualified  interest  in  certain  profits  of 
the  firm  without  making  them  partners." 

In  Meehan  v.  Valentine,  145  U.  S.  611,  623  (1892),  the 
leading  case  on  this  subject,  the  court  said: 

"In  whatever  form  the  rule  is  expressed,  it  is  universally 
held  that  an  agent  or  servant,  whose  compensation  is  meas- 
ured by  a  certain  proportion  of  the  profits  of  the  partnership 
business,  is  not  thereby  made  a  partner,  in  any  sense.  So  an 
agreement  that  the  lessor  of  a  hotel  shall  receive  a  certain  por- 
tion of  the  profits  thereof  by  way  of  rent,  does  not  make  him 
a  partner  with  the  lessee.  .  .  .  And  it  is  now  equally  well  set- 
tled that  the  receiving  of  part  of  the  profits  of  a  commercial 
partnership,  in  lieu  of  or  in  addition  to  interest,  by  way  of 
compensation  for  a  loan  of  money,  has  of  itself  no  greater 
effect. 

"Throughout  the  original  agreement  and  the  renewals 
thereof,  the  sum  of  $10,000  paid  by  Perry  to  the  partnership, 
and  for  which  they  gave  him  their  promissory  notes,  is  spoken 
of  as  a  loan,  for  which  the  copartnership  has  to  pay  him  legal 
interest  at  all  events,  and  also  pay  him  one-tenth  of  the  net 
yearly  profits  of  the  partnership  business  if  those  profits  should 
exceed  the  sum  of  $10,000.  The  manifest  intention  of  the 
parties,  as  apparent  upon  the  face  of  the  agreements,  was  to 
create  the  relation  of  debtor  and  creditor,  and  not  that  of 


PLAN    FOR   STOCK   PARTNERSHIP 


537 


partners.  Perry's  demanding  and  receiving  accounts  and  pay- 
ments yearly  was  in  accordance  with  his  right  as  a  creditor. 
There  is  nothing  in  the  agreement  itself,  or  in  the  conduct  of 
the  parties,  to  show  that  he  assumed  any  other  relation.  He 
never  exercised  any  control  over  the  business.* 

It  must  be  noted,  however,  that  where  an  alleged  loan  is 
only  a  cover  for  a  partnership  investment,  partnership  liability 
cannot  be  avoided  by  the  simple  expedient  of  calling  it  a  loan. 
The  test  as  to  whether  any  particular  advance  of  money  to 
a  partnership  is  a  loan  or  an  investment,  is  usually  whether  the 
so-called  lender  takes  part  in  the  management  of  the  business, 
exercises  control  over  its  property  or  operations,  or  has  a 
proprietary  interest  in  the  firm  assets.^  The  participating  de- 
bentures would,  it  is  obvious,  easily  stand  this  test.  Then 
owners  would  not  be  partners  nor  liable  as  partners. 

§461.     Advantages  of  Suggested  Form  of  Partnership 

In  conclusion  it  may  be  said  that  in  accordance  with  the 
foregoing  suggestions  it  would  be  feasible  to  form  a  partner- 
ship composed  of  three  to  five  or  more  active  members,  the  in- 
terests of  these  active  members  being  represented  by  transfer- 
able certificates  showing  the  investment  of  each  in  the  business. 
The  active  members  would  be  equal  in  the  management  of 
the  business  and  would  practically  occupy  the  position  and 
exercise  the  power  of  a  board  of  directors. 

Additional  capital  required  could  then  be  supplied  by  the 
sale  of  profit-sharing  debentures  issued  in  multiples  of  $100, 


*See  also  Wilson  v.  Edmonds,  130  U.  S.  472  (1889);  18  L.  R.  A.  (N.  S.)  1055, 
note;  Richardson  v.  Hughitt,  76  N.  Y.  "JS  (1879);  Wisotzkey  v.  Insurance  Co.,  113 
A,  D.  (N.  Y.)  S99  (1906);  Miller  v.  Simpson,  107  Va.  af}^^'  (1907);  Cudahy  Packing 
Co.  V.  Hibou,  92  Miss.  234,  (1908);  s.  c,  18  L.  R.  A.  (N.  S.)  975;  Cadenasso  v. 
Antonelle,  127  Gal.  382  (1899);  Waverly  Bank  v.  Hall,  150  Pa.  466  (1892);  Wessels  & 
Co.  V.  Weiss  &  Co.,  166  Pa.  490  (1899),  <in  Pennsylvania  in  such  case  there  must 
be  a  written  agreement);  Boston,  etc.,  Smelting  Co.  v.  Smith,  13  R.  I.,  27  (1880),  (in 
this  case  there  is  a  discussion  of  the  English  cases  and  the  written  agreement  is 
set  out  in  full). 

^  Wood  V.  Valette.  7  O.  St.  1712  (185,7) ;  Fougner  v.  Nat.  Bank,  141  111.  124  (1892) ; 
Hawkins  v.  Campbell,  48  A.  D.  (N.  Y.)  43  (1900);  Magovern  v.  Robertson,  116  N. 
Y.  6i  (1889);  Russell  v.  Herrick,  127  A.  D.  (N.  Y.)  503.  This  last  case  was  reversed 
on  the  dissenting  opinion,  in  195  N.  Y.  586  (1909). 


5.38  ALLIED   FORMS   OF   ORGANIZATION 

drawing  interest  and  entitling  the  holders  to  share  in  the 
profits,  but  not  involving  them  in  partnership  obligations. 

There  is  no  direct  precedent  for  such  an  organization  as 
this,  but  there  is  precedent  for  the  several  essential  features 
and  there  is  no  legal  obstacle  to  their  combination.  Any  or- 
ganization of  the  kind  should,  of  course,  be  formed  under  the 
direction  of  competent  legal  counsel  and  with  due  regard  to 
local  laws  and  decisions.  If  properly  constituted  it  would  re- 
sult in  an  exceedingly  equitable  and  effective  business  organ- 
ization, having  the  following  advantages: 

1.  The  managing  body — corresponding  to  the  directors  of 
a  corporation — would  be  a  partnership  in  which  all  the  mem- 
bers had  equal  power  and  equal  representation  and  personal 
liability. 

2.  The  interests  of  these  partners  would  be  represented 
by  transferable  certificates  of  interest  having  all  the  conven- 
ience of  corporate  stock. 

3.  The  fact  of  the  managers  being  also  partners  and 
subject  to  every  liability  of  partners,  would  effectually  insure 
the  vital  interest  of  each  in  the  business.  There  could  be  noth- 
ing analogous  to  the  dummy  directors,  or  directors  who  merely 
loan  their  names,  so  familiar  in  the  corporation. 

4.  The  facts  (a)  that  the  managers  are  liable  as  part- 
ners, and  (b)  that  the  investors  are  not  partners  and  not  stock- 
holders, but  are  on  the  better  protected  plane  of  creditors, 
would,  when  this  was  once  understood,  make  it  easier  to  se- 
cure capital  than  is  the  case  under  the  ordinary  irresponsible 
corporate  organization. 

5.  The  debenture-issuing  partnership,  as  a  voluntary 
organization  would  secure  immunity  from  the  many  taxes  and 
reports,  and  the  undue  publicity  which  now  attaches  to  the 
corporate  form. 

If  such  a  form  of  business  organization  were  adopted, 
it  would  be  necessary,  until  its  legal  status  had  become  es- 


PLAN   FOR   STOCK  PARTNERSHIP 


539 


tablished  by  adjudication,  to  have  the  aid  of  competent  local 
counsel  in  each  case.  Such  counsel  should,  in  addition  to  the 
usual  professional  attainments,  have  some  initiative  and  not 
be  too  slavishly  dominated  by  fealty  to  precedent.  He  should 
have  skill  to  adapt  and  vary  the  proposed  form  to  the  needs  of 
the  particular  business  and  to  the  requirements  of  any  local 
statutes  that  might  affect  it.  Likewise  he  should  be  able  to 
bring  the  organization  into  harmony  with  the  attitude  of  the 
courts  of  the  special  state  on  questions  of  partnership  law. 


BOOK  V 
FORMS  AND  PRECEDENTS 


CHAPTER   LXI 

CHARTER  FORMS 

Form  I.     Delaware  Charter 

Certificate  of  Incorporation 
of  the 
•       WILMINGTON  BISCUIT  COMPANY 


First — The  name  of  this  corporation  shall  be 

"Wilmington  Biscuit  Company'* 

Second — The  location  of  its  principal  office  in  the  State  of  Delaware 
shall  be  in  the  City  of  Wilmington,  County  of  Newcastle.  The  agent 
in  charge  thereof  shall  be  Philip  L.  Farnsworth. 

Third — The  objects  and  purposes  for  which  this  corporation  is  formed 
are  to  do  any  and  all  of  the  things  herein  set  forth,  as  fully  and  to  the 
same  extent  as  natural  persons  might  or  could  do,  and  in  any  part  of  the 
world,  viz.  : 

(a)  To  manufacture,  buy,  sell,  pack,  prepare,  and  generally  to 
deal  in  and  with  biscuits,  crackers,  cakes,  Italian  paste,  confectionery, 
cereals,  coffees,  teas,  dried  fruits,  and  foods  and  food  products  and 
materials  of  all  kinds,  either  raw  or  manufactured,  that  may  be  used 
in  foods  and  food  products  and  beverages,  or  for  the  packing, 
adapting,  preparing,  or  preserving  of  such  foods,  food  products,  or 
beverages;  and  generally  to  mix,  adapt,  refine,  prepare,  preserve, 
manufacture,  and  dispose  of  all  such  goods,  wares,  merchandise,  and 
materials,  either  in  original  packages  or  in  such  cans,  jars,  boxes, 
cartons,  or  other  containing  packages  as  may  be  found  desirable. 

(b)  To  purchase,  lease,  or  otherwise  acquire  lands,  buildings, 
tenements,  and  factories  in  Delaware  or  elsewhere,  for  the  plants, 
offices,  workshops,  warehouses,  laboratories,  and  manufactories  of 
the  Company,  and  to  purchase,  lease,  or  otherwise  acquire  tools, 
implements,  engines,  machinery,  apparatus,  fixtures,  and  conven- 
iences of  all  kinds  for  the  manufacture,  manipulation,  preparation, 
preservation,  packing,  and  handling  of  the  materials  and  products  of 
the  Company. 

(c)  To  apply  for,  obtain,  purchase,  lease,  or  otherwise  acquire, 
and  to  register,  hold,  own,  and  use  any  and  all  trade-marks,  trade 
secrets,  processes,  formulae,  inventions,  and  improvements  capable 
of  being  used  in  connection  with  the  work  of  the  Company,  whether 
secured  under  letters  of  patent  in  the  United  States,  or  elsewhere  or 
otherwise;  and  to  use,  operate,  and  manufacture  under  the  same, 

543 


544  FORMS   AND   PRECEDENTS 

and  to  sell,  assign,  grant  licenses  in  respect  of  or  otherwise  dispose 
of  and  turn  the  same  to  the  account  and  profit  of  the  Company. 

(d)  To  do  any  and  all  things  set  forth  in  this  certificate  as 
objects,  purposes,  powers,  or  otherwise  to  the  same  extent  and  as 
fully  as  natural  persons  might  do,  and  in  any  part  of  the  world,  as 
principals,  agents,  contractors,  trustees,  or  otherwise,  and  either 
alone  or  in  company  with  others. 

(e)  To  have  offices,  conduct  its  business,  and  promote  its  objects 
within  and  without  the  State  of  Delaware,  in  other  States,  the  Dis- 
trict of  Columbia,  the  territories  and  colonial  dependencies  of  the 
United  States,  and  in  foreign  countries,  without  restriction  as  to 
place  or  amount. 

Fourth — The  amount  of  the  total  authorized  capital  stock  of  this  cor- 
poration is  Five  Hundred  Thousand  Dollars  ($500,000),  divided  into  Five 
Thousand  (5,000)  Shares  of  the  par  value  of  One  Hundred  Dollars  ($100) 
each. 

The  amount  of  capital  stock  with  which  this  corporation  will  com- 
mence business  is  the  sum  of  One  Thousand  Dollars   ($1,000). 

Fifth — The  names  and  places  of  residence  of  each  of  the  original 
subscribers  to  the  capital  stock,  and  the  number  of  shares  subscribed  for 
by  each,  are  as  follows  : 

NO.   OF 
NAMES  RESIDENCES  SHARES 

Francis  G.  Fawcett  Pittsburgh,  Pa.  3 

Randolph  C.  Blythe  Pittsburgh,  Pa.  3 

A.  C.  Bentley  Philadelphia,  Pa.  4 

Sixth — The  existence  of  this  corporation  shall  be  perpetual. 

Seventh — The  private  property  of  the  stockholders  shall  not  be  subject 
to  the  payment  of  corporate  debts  to  any  extent  whatever. 

Eighth — In  furtherance,  and  not  in  limitation  of  the  powers  conferred 
by  statute,  the  Board  of  Directors  are  expressly  authorized: 

To  make,  alter,  amend,  and  repeal  the  by-laws;  to  fix  the 
amount  to  be  reserved  for  working  capital,  and  to  authorize  and 
cause  to  be  executed  mortgages  and  liens,  without  limit  as  to  amount, 
upon  the  property  and  franchises  of  this  corporation. 

With  the  consent  in  writing,  and  pursuant  to  a  vote  of  the 
holders  of  a  majority  of  the  capital  stock  issued  and  outstanding, 
to  dispose,  in  any  manner,  of  the  whole  property  of  this  corpora- 
tion. 

To  determine  from  time  to  time  whether  and  to  what  extent 
the  accounts  and  books  of  this  corporation,  or  any  of  them,  shall 
be  open  to  the  inspection  of  the  stockholders;  and  no  stockholder 
shall  have  any  right  of  inspecting  any  account,  or  book,  or  docu- 
ment of  this  corporation,  except  as  conferred  by  law,  or  the  by- 
laws, or  by  resolution  of  the  stockholders. 

The  stockholders  and  directors  shall  have  power  to  hold  their  meet- 
ings and  keep  the  books,  documents,  and  papers  of  the  corporation  outside 
of  the  State  of  Delaware,  at  such  places  as  may  be  from  time  to  time 
designated  by  the  by-laws  or  by  resolution  of  the  stockholders  or  directors, 
except  as  otherwise  required  by  the  laws  of  Delaware, 


CHARTER  FORMS 


545 


It  is  the  intention  that  the  objects,  purposes,  and  powers  specified  in 
the  third  paragraph  hereof  shall,  except  where  otherwise  expressed  in  said 
paragraph,  be  nowise  limited  or  restricted  by  reference  to  or  in  inference 
from  the  terms  of  any  other  clause  or  paragraph  in  this  certificate  of  incor- 
poration, but  that  the  objects,  purposes,  and  powers  specified  in  the  third 
paragraph  and  in  each  of  the  clauses  or  paragraphs  of  this  charter  shall 
be  regarded  as  independent  objects,  purposes,  and  powers. 

We,  the  undersigned,  being  all  the  original  subscribers  to  the  capital 
stock  hereinbefore  named,  for  the  purpose  of  forming  a  corporation  under 
the  laws  of  the  State  of  Delaware,  do  make,  file,  and  record  this  certificate, 
and  do  certify  that  the  facts  herein  stated  are  true ;  and  we  have  accord- 
ingly hereunto  set  our  respective  hands  and  seals,  this  sixteenth  day  of 
March,  A.  D.  1917. 


Francis  G.  Fawcett 
Randolph  C.  Blythe 
A.  C,  Bentley 


SEAL 
SEAL 
SEAL 


} 


In  presence  of 

George  S.  Lord 
Frank  E.  Brown 

State  of  Delaware  .  , 

County  of  Newcastle 

Be  It  Remembered,  that  on  this  sixteenth  day  of  March,  A.  D.  1917, 
personally  came  before  me,  Thomas  L.  King,  a  Notary  Public  in  and  for 
the  county  and  state  aforesaid,  Francis  G.  Fawcett,  Randolph  C.  Blythe, 
and  A.  C.  Bentley,  parties  to  the  foregoing  certificate  of  incorporation, 
known  to  me  personally  to  be  such,  and  severally  acknowledged  the  said 
certificate  to  be  the  act  and  deed  of  the  signers  respectively,  and  that  the 
facts  therein  stated  are  truly  set  forth. 

Given  under  my  hand  and  seal  of  office  the  day  and  year  aforesaid. 

rNOTARiAL"!  Thomas  L.  King, 

I     seal     f  Notary  Public 


Form  2.     New  Jersey  Charter  (U.  S.  Steel  Corp.) 

Amended  Certificate  of  Incorporation 

of 

UNITED  STATES  STEEL  CORPORATION 


We,  the  undersigned,  in  order  to  form  a  corporation  for  the  purposes 
hereinafter  stated,  under  and  pursuant  to  the  provisions  of  the  Act  of  the 
Legislature  of  the  State  of  New  Jersey,  entitled  "An  Act  Concerning  Cor- 
porations (Revision  of  1896),"  and  the  acts  amendatory  thereof  and  sup- 
plementary thereto,  do  hereby  certify  as  follows  : 

I — The  name  of  the  corporation  is 

"United  States  Steel  Corporation"' 

II — The  location  of  its  principal  office  in  the  State  of  New  Jersey  is 


546  FORMS  AND   PRECEDENTS 

at  No.  51  Newark  street,  in  the  City  of  Hoboken,  County  of  Hudson.  The 
name  of  the  agent  therein  and  in  charge  thereof,  upon  whom  process 
against  the  corporation  may  be  served,  is  Hudson  Trust  Company.  Said 
office  is  to  be  the  registered  office  of  said  corporation. 

in — The  objects  for  which  the  corporation  is  formed  are: 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber,  and 
other  materials,  and  all  or  any  articles  consisting  or  partly  con- 
sisting of  iron,  steel,  copper,  wood,  or  other  materials,  and  all  or 
any  products  thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  containing 
coal  or  iron,  manganese,  stone  or  other  ores,  or  oil,  and  any  wood- 
lands, or  other  lands,  for  any  purpose  of  the  company. 

To  mine  or  otherwise  to  extract  or  remove  coal,  ores,  stone  and 
other  minerals  and  timber  from  any  lands  owned,  acquired,  leased 
or  occupied  by  the  company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in  iron,  steel,  man- 
ganese, copper,  stone,  ores,  coal,  coke,  wood,  lumber  and  other 
materials  and  any  of  the  products  thereof,  and  any  articles  con- 
sisting or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines,  cars 
and  other  equipment,  railroads,  docks,  slips,  elevators,  water 
works,  gas  works  and  electric  works,  viaducts,  aqueducts,  canals 
and  other  waterways,  and  any  other  means  of  transportation, 
and  to  sell  the  same,  or  otherwise  dispose  thereof,  or  to  maintain 
and  operate  the  same,  except  that  the  company  shall  not  maintain 
or  operate  any  railroad  or  canal  in  the  State  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease  or  otherwise  to 
acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to  sell, 
assign,  or  otherwise  to  dispose  of,  any  trademarks,  trade  names, 
patents,  inventions,  improvements  and  processes  used  in  connec- 
tion with  or  secured  under  letters  patent  of  the  United  States,  or 
elsewhere,  or  otherwise;  and  to  use,  exercise,  develop,  grant 
licenses  in  respect  of,  or  otherwise  turn  to  account  any  such 
trademarks,  patents,  licenses,  processes  and  the  like,  or  any  such 
property  or  rights. 

To  engage  in  any  other  manufacturing,  mining,  construction  or 
transportation  business  of  any  kind  or  character  whatsoever,  and  to 
that  end  to  acquire,  hold,  own  and  dispose  of  any  and  all  property, 
assets,  stocks,  bonds  and  rights  of  any  and  every  kind,  but  not  to 
engage  in  any  business  hereunder  which  shall  require  the  exer- 
cise of  the  right  of  eminent  domain  within  the  State  of  New 
Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold  or 
to  dispose  of  stocks,  bonds,  or  any  other  obligations  of  any  corpo- 
ration formed  for,  or  then  or  theretofore  engaged  in  or  pursuing 
any  one  or  more  of  the  kinds  of  business,  purposes,  objects  or 
operations  above  indicated,  or  owning  or  holding  any  property  of 
any  kind  herein  mentioned,  or  of  any  corporation  owning  or  hold- 
ing the  stocks  or  the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dispose  of,  any 
stock,  bonds  or  other  obligations  of  any  such  other  corporation; 
to  aid  in  any  manner  any  corporation  whose  stock,  bonds  or  other 
obligations  are  held  or  are  in  any  manner  guaranteed  by  the  com- 
pany, and  to  do  any  other  acts  or  things  for  the  preservation,  pro- 


CHARTER  FORMS  547 

tection,  improvement  or  enhancement  of  the  value  of  any  such 
stock,  bonds  or  other  obligations,  or  to  do  any  acts  or  things 
designed  for  any  such  purpose;  and,  while  owner  of  any  such 
stock,  bonds  or  other  obligations,  to  exercise  all  the  rights,  powers 
and  privileges  of  ownership  thereof,  and  to  exercise  any  and  all 
voting  power  thereon.^ 

The  business  or  purpose  of  the  company  is  from  time  to  time  to 
do  any  one  or  more  of  the  acts  and  things  herein  set  forth;  and 
it  may  conduct  its  business  in  other  States  and  in  the  Territories 
and  in  foreign  countries,  and  may  have  one  office  or  more  than 
one  office,  and  keep  the  books  of  the  company  outside  of  the  State 
of  New  Jersey,  except  as  otherwise  may  be  provided  by  law ;  and 
may  hold,  purchase,  mortgage  and  convey  real  and  personal  prop- 
erty either  in  or  out  of  the  State  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and  powers 
of  the  corporation,  it  is  hereby  expressly  declared  and  provided 
that  the  corporation  shall  have  power  to  issue  bonds  and  other 
obligations  in  payment  for  property  purchased  or  acquired  by  it, 
or  for  any  other  object  in  or  about  its  business;  to  mortgage  or 
pledge  any  stock,  bonds  or  other  obligations,  or  any  property 
which  may  be  acquired  by  it,  to  secure  any  bonds  or  other  obliga- 
tions by  it  issued  or  incurred ;  to  guarantee  any  dividends  or 
bonds  or  contracts  or  other  obligations ;  to  make  and  perform 
contracts  of  any  kind  and  description;  and  in  carrying  on  its 
business,  or  for  the  purpose  of  attaining  or  furthering  any  of  its 
objects,  to  do  any  and  all  other  acts  and  things,  and  to  exercise 
any  and  all  other  powers  which  a  copartnership  or  natural  person 
could  do  and  exercise,  and  which  now  or  hereafter  may  be 
authorized  by  law. 

IV — The  total  authorized  capital  stock  of  the  corporation  is  eleven 
hundred  million  dollars  ($1,100,000,000),  divided  into  eleven  million  shares 
of  the  par  value  of  one  hundred  dollars  each.  Of  such  total  authorized 
capital  stock  five  million  five  hundred  thousand  shares,  amounting  to  five 
hundred  and  fifty  million  dollars,  shall  be  preferred  stock,  and  five  million 
five  hundred  thousand  shares,  amounting  to  five  hundred  and  fifty  million 
dollars,  shall  be  common  stock. 

From  time  to  time  the  preferred  stock  and  the  common  stock  may  be 
increased  according  to  law,  and  may  be  issued  in  such  amounts  and  propor- 
tions as  shall  be  determined  by  the  Board  of  Directors  and  as  may  be 
permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive,  when 
and  as  declared,  from  the  surplus  or  net  profits  of  the  corporation,  yearly 
dividends  at  the  rate  of  seven  per  centum  per  annum  and  no  more,  payable 
quarterly  on  dates  to  be  fixed  by  the  by-laws.  The  dividends  on  the  pre- 
ferred stock  shall  be  cumulative,  and  shall  be  payable  before  any  divi- 
dends on  the  common  stock  shall  be  paid  or  set  apart;  so  that,  if  in  any 
year  dividends  amounting  to  seven  per  cent  shall  not  have  been  paid 
thereon,  the  deficiency  shall  be  payable  before  any  dividends  shall  be  paid 
upon  or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for  all 
previous  years  shall  have  been  declared  and  shall  have  become  payable, 


^  The  power  to  purchase,  hold,  and  vote  stock  in  other  corporations  has  been 
limited  by  amendments  of  "An  Act  Concerning  Corporations,"  §  51 ;  see  L,  1913,  Ch. 
18,  and  L.  1915,  Ch.  114. 


548  FORMS  AND  PRECEDENTS 

and  the  accrued  quarterly  installments  for  the  current  year  shall  have  been 
declared,  and  the  company  shall  have  paid  such  cumulative  dividends  for 
previous  years  and  such  accrued  quarterly  installments,  or  shall  have  set 
aside  from  its  surplus  or  net  profits  a  sum  sufficient  for  the  payment 
thereof,  the  Board  of  Directors  may  declare  dividends  on  the  common 
stock,  payable  then  or  thereafter,  out  of  any  remaining  surplus  or  net 
profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up  (whether 
voluntary  or  involuntary)  of  the  corporation,  the  holders  of  the  preferred 
stock  shall  be  entitled  to  be  paid  in  full  both  the  par  amount  of  their 
shares  and  the  unpaid  dividends  accrued  thereon  before  any  amount  shall 
be  paid  to  the  holders  of  the  common  stock  and,  after  the  payment  to  the 
holders  of  the  preferred  stock  of  its  par  value  and  the  unpaid  accrued 
dividends  thereon,  the  remaining  assets  and  funds  shall  be  divided  and 
paid  to  the  holders  of  the  common  stock  according  to  their  respective 
shares. 

V — The  names  and  post-office  addresses  of  the  Incorporators,  and  the 
number  of  shares  of  stock  for  which  severally  and  respectively  we  do 
hereby  subscribe  (the  aggregate  of  our  said  subscriptions,  being  three 
thousand  dollars,  is  the  amount  of  capital  stock  with  which  the  corpora- 
tion will  commence  business),  are  as  follows: 

NUMBER  OF    SHARES 
PREFERRED      COMMON 

Name  Post-Office  Address  stock  stock 

Charles  C.  Cluff  51  Newark  St.,  Hoboken,  N.  J.  5  5 

William  J.  Curtis  51  Newark  St.,  Hoboken,  N.  J.  5  5 

Charles  MacVeagh  51  Newark  St.,  Hoboken,  N.  J.  5  5 

VI — The  duration  of  the  corporation  shall  be  perpetual. 

VII — The  number  of  Directors  of  the  company  shall  be  fixed  from 
time  to  time  by  the  by-laws;  but  the  number,  if  fixed  at  more  than  three, 
shall  be  some  multiple  of  three.  The  Directors  shall  be  classified  with  re- 
spect to  the  time  for  which  they  shall  severally  hold  office  by  dividing  them 
into  three  classes,  each  consisting  of  one-third  of  the  whole  number  of 
the  Board  of  Directors.  The  Directors  of  the  first  class  shall  be  elected 
for  a  term  of  one  year ;  the  Directors  of  the  second  class  for  a  term  of 
two  years,  and  the  Directors  of  the  third  class  for  a  term  of  three  years; 
and  at  each  annual  election  the  successors  of  the  class  of  Directors  whose 
terms  shall  expire  in  that  year  shall  be  elected  to  hold  office  for  the 
term  of  three  years,  so  that  the  term  of  office  of  one  class  of  Directors 
shall  expire  in  each  year. 

The  number  of  Directors  may  be  increased  as  may  be  provided  in  the 
by-laws.  In  case  of  any  increase  of  the  number  of  the  Directors  the  addi- 
tional Directors  shall  be  elected  as  may  be  provided  in  the  by-laws, 
by  the  Directors  or  by  the  stockholders  at  an  annual  or  special  meeting; 
and  one-third  of  their  number  shall  be  elected  for  the  then  unexpired  por- 
tion of  the  term  of  the  Directors  of  the  first  class,  one-third  of  their 
number  for  the  unexpired  portion  of  the  term  of  the  Directors  of  the 
second  class,  and  one-third  of  their  number  for  the  unexpired  portion  of 
the  term  of  Directors  of  the  third  class,  so  that  each  class  of  Directors 
shall  be  increased  equally. 

In  case  of  any  vacancy  in  any  class  of  Directors  through  death, 
resignation,  disqualification  or  other  cause,  the  remaining  Directors,  bj 
affirmative  vote  of  a  majority  of  the  Board  of  Directors,  may  elect  a 


CHARTER   FORMS  549 

successor  to  hold  office  for  the  unexpired  portion  of  the  term  of  the 
Director  whose  place  shall  be  vacant,  and  until  the  election  of  a  suc- 
cessor. 

The  Board  of  Directors  shall  have  power  to  hold  their  meetings  out- 
side of  the  State  of  New  Jersey,  at  such  places  as  from  time  to  time  may- 
be designated  by  the  by-laws  or  by  resolution  of  the  Board.  The  by-laws 
may  prescribe  the  number  of  Directors  necessary  to  constitute  a  quorum 
of  the  Board  of  Directors,  which  number  may  be  less  than  a  majority  of 
the  whole  number  of  the  Directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by  stockholders 
holding  at  least  two-thirds  of  the  capital  stock  of  the  corporation,  which 
is  represented  and  voted  upon  in  person  or  by  proxy  at  a  meeting  specially 
called  for  that  purpose  or  at  an  annual  meeting,  the  Board  of  Directors 
shall  not  mortgage  or  pledge  any  of  its  real  property,  or  any  shares  of 
the  capital  stock  of  any  other  corporation;  but  this  prohibition  shall  not 
be  construed  to  apply  to  the  execution  of  any  purchase-money  mortgage 
or  any  other  purchase-money  lien.  As  authorized  by  the  Act  of  the  Legis- 
lature of  the  State  of  New  Jersey,  passed  March  22,  1901,  amending  the 
17th  section  of  the  Act  Concerning  Corporations  (Revision  of  1896),  any 
action  which  theretofore  required  the  consent  of  the  holders  of  two- 
thirds  of  the  stock  at  any  meeting  after  notice  to  them  given,  or  required 
their  consent  in  writing  to  be  filed,  may  be  taken  upon  the  consent  of, 
and  the  consent  given  and  filed  by  the  holders  of  two-thirds  of  the  stock 
of  each  class  represented  at  such  meeting  in  person  or  by  proxy. 

Any  officers  elected  or  appointed  by  the  Board  of  Directors  may  be 
removed  at  any  time  by  the  affirmative  vote  of  a  majority  of  the  whole 
Board  of  Directors.  Any  other  officer  or  employee  of  the  company  may 
be  removed  at  any  time  by  vote  of  the  Board  of  Directors,  or  by  any 
committee  or  superior  officer  upon  whom  such  power  of  removal  may  be 
conferred  by  the  by-laws  or  by  vote  of  the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  Board,  may  appoint  from  the  Directors  an  executive  committee,  of 
which  a  majority  shall  constitute  a  quorum;  and  to  such  extent  as  shall 
be  provided  in  the  by-laws,  such  committee  shall  have  and  may  exercise 
all  or  any  of  the  powers  of  the  Board  of  Directors,  including  power  to 
cause  the  seal  of  the  corporation  to  be  affixed  to  all  papers  that  may  re- 
quire it. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  Board,  may  appoint  any  other  standing  committees,  and  such  stand- 
ing committees  shall  have  and  may  exercise  such  powers  as  shall  be  con- 
ferred or  authorized  by  the  by-laws. 

The  Board  of  Directors  may  appoint  not  only  other  officers  of  the 
company,  but  also  one  or  more  Vice-Presidents,  one  or  more  Assistant 
Treasurers,  and  one  or  more  Assistant  Secretaries ;  and  to  the  extent 
provided  in  the  by-laws  the  persons  so  appointed  respectively  shall  have 
and  may  exercise  all  the  powers  of  the  President,  of  the  Treasurer  and 
of  the  Secretary,  respectively. 

The  Board  of  Directors  shall  have  power  from  time  to  time  to  fix  and 
to  determine  and  to  vary  the  amount  of  the  working  capital  of  the  com- 
pany; and  to  direct  and  determine  the  use  and  disposition  of  any  surplus 
or  net  profits  over  and  above  the  capital  stock  paid  in;  and  in  its  dis- 
cretion the  Board  of  Directors  may  use  and  apply  any  such  surplus  or 
accumulated  profits  in  purchasing  or  acquiring  its  bonds  or  other  obliga- 
tions, or  shares  of  its  own  capital  stock,  to  such  extent  and  in  such 
manner  and  upon  such  terms  as  the  Board  of  Directors  shall  deem  Q:^m 


550 


FORMS   AND   PRECEDENTS 


pedient;  but  shares  of  such  capital  stock  so  purchased  or  acquired  may 
be  resold,  unless  such  shares  shall  have  been  retired  for  the  purpose 
of  decreasing  the  company's  capital  stock,  as  provided  by  law. 

The  Board  of  Directors  from  time  to  time  shall  determine  whether 
and  to  what  extent,  and  at  what  times  and  places,  and  under  what  con- 
ditions and  regulations,  the  accounts  and  books  of  the  Corporation,  or 
any  of  them,  shall  be  open  to  the  inspection  of  the  stockholders,  and 
no  stockholder  shall  have  any  right  to  inspect  any  account  or  book  or 
document  of  the  Corporation,  except  as  conferred  by  statute  or  authorized 
by  the  Board  of  Directors,  or  by  resolution  of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  stockholders,  the  Board  of 
Directors  may  make  by-laws,  and  from  time  to  time  may  alter,  amend 
or  repeal  any  by-laws,  but  any  by-laws  made  by  the  Board  of  Directors 
may  be  altered  or  repealed  by  the  stockholders  at  any  annual  meeting,  or 
at  any  special  meeting,  provided  notice  of  such  proposed  alteration  or 
repeal  be  included  in  the  notice  of  the  meeting. 

In  Witness  Whereof,  we  have  hereunto  set  our  hands  and 
seals  the  23rd  day  of  February,  1901. 

Charles  C.  Cluff  [l.  s.] 

William  J.  Curtis  [l.  s.] 

Charles  MacVeagh       [l.  s.] 
Signed,  sealed  and  delivered  in 
the  presence  of 

Francis  Lynde  Stetson 
Victor  Morawetz 


(Form  of  acknowledgment  for  New  Jersey  charter  is  given  below) 


} 


State  of  New  Jersey 
County  of  Hudson 

Be  It  Remembered,  that  on  this day  of ,  A.  D , 

before  the  undersigned  personally  appeared 

and   

who  I  am  satisfied  are  the  persons  named  in  and  who  executed  the  fore- 
going certificate,  and  I,  having  first  made  known  to  them  and  each  of 
them  the  contents  thereof,  they  did  each  acknowledge  that  they  signed, 
sealed  and  delivered  the  same  as  their  voluntary  act  and  deed. 


In  New  Jersey  acknowledgments  of  charters  are  usually 
taken  before  a  Chancellor,  a  Justice  of  the  Supreme  Court,  a 
Master  in  Chancery,  or  an  attorney  at  law,  though  a  number 
of  other  state  and  county  officials  are  empowered  thereto. 
Outside  the  state,  acknowledgments  are  preferably  taken 
before  a  Master  in  Chancery  or  a  Commissioner  of  Deeds 
for  New  Jersey.  A  New  Jersey  notary  cannot  take  acknowl- 
edgments. 


CHARTER   FORMS  551 


Form  3.     New  York  Charter 


Certificate  of  Incorporation 

of  the 

MIDVALE  REALTY  CORPORATION 


We,  the  undersigned,  all  being  of  full  age  and  two-thirds  being  citizens 
of  the  United  States  and  one  of  us  a  resident  of  the  State  of  New  York, 
for  the  purpose  of  forming  a  corporation  under  the  Business  Corporations 
Law  of  the  State  of  New  York,  do  hereby  certify  and  set  forth: 

First — The  name  of  said  corporation  shall  be 

"MiDVALE  Realty  Corporation" 

Second — The  purposes  for  which  said  corporation  is  to  be  formed  are 
as  follows : 

(Purposes  omitted) 

Third — The  amount  of  capital  stock  of  said  corporation  shall  be  One 
Million  Dollars  ($1,000,000). 

The  amount  of  capital  with  which  said  corporation  will  begin  business 
is  One  Thousand  Dollars  ($1,000). 

Fourth — The  number  of  shares  of  which  said  capital  stock  is  to  con- 
sist shall  be  Ten  Thousand  (10,000)  shares,  of  the  par  value  of  One  Hun- 
dred Dollars  ($100)  each. 

Of  said  capital  stock  Five  Thousand  (5,000)  Shares,  of  the  par  value 
of  Five  Hundred  Thousand  Dollars  ($500,000)  shall  be  cumulative  pre- 
ferred stock,  entitled  to  an  annual  dividend  of  six  per  cent  (6%)  from  the 
profits  of  the  corporation,  payable  semiannually,  on  the  tenth  days  of 
January  and  July  in  each  year,  before  any  dividends  are  paid  upon  the 
common  stock,  and  to  share  equally  with  the  common  stock  in  any  excess 
paid  in  any  year  above  six  per  cent  (6%)  to  all  the  stock,  and  in  the 
event  of  liquidation  or  dissolution  from  any  cause  said  preferred  stock 
shall  be  entitled  to  be  paid  in  full  from  the  assets  of  the  corporation 
before  any  thing  is  paid  to  the  common  stock.  The  holders  of  such  pre- 
ferred stock  shall  not  be  entitled  to  vote  in  any  meeting  of  the  stock- 
holders or  election  of  directors,  unless  the  accumulated  dividends  due  and 
unpaid  such  preferred  stock  at  the  time  shall  equal  or  exceed  fifteen 
per  cent  (15%)  of  the  par  value  of  said  stock. 

Of  said  capital  stock  Five  Thousand  (5,000)  Shares,  of  the  par  value 
of  Five  Hundred  Thousand  Dollars  ($500,000)  shall  be  common  stock  of 
the  corporation. 

Fifth — The  principal  business  office  of  said  corporation  shall  be  located 
in  the  Borough  of  Manhattan  and  in  the  City,  County,  and  State  of  New 
York. 

Sixth — The  duration  of  said  corporation  shall  be  perpetual. 

Seventh — The  number  of  directors  of  said  corporation  shall  be  five. 

Eighth — The  names  and  post-office  addresses  of  the  directors  of  said 
corporation  for  the  first  year  are  as  follows : 

(Names  and  addresses  of  directors  omitted.) 


552 


FORMS   AND   PRECEDENTS 


Ninth — The  names  and  post-office  addresses  of  the  subscribers  to  this 
certificate,  and  the  number  of  shares  which  each  agrees  to  take  in  said 
corporation  are  as  follows: 

Names                                                  Addresses  Shares 

John  B.  Clark  203  Broadway,  New  York  City  i 

Charles  F.  Holbrook  Mount  Vernon,  N.  Y.  i 

Douglas  Raymond  212  Madison  Ave.,  New  York  City  i 

Tenth — At  all  elections  of  directors  of  this  corporation  each  stock- 
holder shall  be  entitled  to  as  many  votes  as  shall  equal  the  number  of  his 
shares  of  stock,  multiplied  by  the  number  of  directors  to  be  elected,  and 
he  may  cast  all  of  such  votes  for  a  single  director  or  may  distribute  them 
among  the  number  to  be  voted  for,  or  any  two  or  more  of  them,  as  he 
may  see  fit. 

In  Witness  Whereof,  we  have  made  and  signed  this  certificate 
in  duplicate  this  13th  day  of  November,  one  thousand  nine 
hundred  and  seventeen. 

John  B.  Clark 
Charles  F.  Holbrook 
Douglas  Raymond 


State  of  New  York         \         . 
County  of  New  York      J 

Personally  appeared  before  me  this  13th  day  of  November,  191 7,  John 
B.  Clark,  Charles  F.  Holbrook,  and  Douglas  Raymond,  to  me  personally 
known  to  be  the  persons  described  in  and  who  executed  the  foregoing 
certificate  and  severally  acknowledged  that  they  executed  the  same  for  the 
purposes  therein  set  forth. 

r  notarial  I  jj^^^Y  P  Sherwood, 

*-     ^^^      J  Notary  Public  for 

New  York  County 


Form  4.     New^York  Charter— Stock  Without  Par  Value 

Certificate  of  Incorporation 
of 

josscelyn  film  supply  corporation 


We,  the  undersigned,  all  being  persons  of  full  age,  and  at  least  two- 
thirds  being  citizens  of  the  United  States,  and  at  least  one  being  a  resi- 
dent of  the  State  of  New  York,  desiring  to  form  a  corporation  pursuant 
to  the  provisions  of  the  Business  Corporation  Law  of  the  State  of  New 
York,  do  hereby  certify  and  set  forth: 

1.  The  name  of  the  proposed  corporation  is 

"Josscelyn  Film  Supply  Corporation" 

2.  The  purposes  for  which  it  is  to  be  formed  are : 

To  purchase,  hire,  borrow,  or  acquire  in  any  manner,  and  to  sell. 
let,  transfer  or  in  any  wise  dispose  of  film  for  use  in  motion  picture 


CHARTER   FORMS  553 

cameras  and  motion  picture  film  of  any  and  every  sort  and  prop- 
erty of  any  and  all  kinds  necessary  or  accessory  to  the  use  of  such 
film,  or  pertaining  in  any  way  to  the  motion  picture  business. 

To  purchase,  hire,  and  acquire  any  interest  of  any  kind  what- 
soever in  personal  property  of  any  and  every  character,  and  deal  in 
personal  property  of  any  and  every  description,  and  to  let  or 
pledge  or  create  any  other  estate  or  interest  in  or  encumbrance 
upon  personal  property. 

To  acquire  the  good-will,  rights,  and  property  of  any  persons, 
firms,  associations,  or  corporations  engaged  in  any  similar  business 
whatsoever. 

To  apply  for,  obtain,  purchase,  or  otherwise  acquire,  and  to 
sell,  lease,  or  otherwise  dispose  of  patents  and  applications  therefor, 
inventions,  licenses,  trade-marks,  and  copyrights,  and  similarly  to 
purchase  or  acquire  and  to  sell  or  otherwise  dispose  of  secret  proc- 
esses, and  to  use,  exercise,  develop,  or  create  licenses  in  respect 
of  and  otherwise  to  turn  to  account  such  patents  or  applications 
therefor,  secret  processes,  licenses,  trade-marks,  and  copyrights. 

To  act  as  agent,  representative,  or  factor  for  any  individual, 
firm,  partnership,  association,  or  corporation  in  transacting,  con- 
ducting, and  promoting  the  business  of  such  individual,  firm,  part- 
nership, association,  or  corporation,  and  to  acquire,  possess,  enjoy, 
encumber,  and  dispose  of  real  and  personal  property  of  any  name, 
nature,  and  description,  whether  corporeal  or  incorporeal,  and 
wheresoever  situated,  necessary,  or  desirable  for  the  purposes  of  its 
i  business. 

To  purchase,  acquire,  hold,  and  dispose  of  stocks,  bonds,  and 
other  evidences  of  indebtedness  of  corporations  wheresoever  organ- 
ized, and  to  pay  for  the  same  in  cash  or  in  property  or  by  the 
issuance  of  its  own  stock,  bonds,  or  other  obligations,  to  exercise 
in  respect  thereto  all  of  the  rights,  powers,  and  privileges  of  indi- 
vidual owners  or  holders  thereof,  and  to  exercise  all  voting  powers 
thereon. 

To  purchase  or  otherwise  acquire  shares  of  its  own  capital 
stock,  and  to  hold  or  dispose  of  the  same  or  to  retire  the  same, 
subject,  however,  to  all  provisions  of  law. 

To  transact  any  or  all  of  its  business  outside  of  the  State  of 
New  York,  and  at  any  place,  or  at  one  or  more  places  within  the 
United  States  of  America,  Dominion  of  Canada,  and  in  any  other 
.  part  of  the  world,  and  the  corporation  shall  have  all  the  power  to 
accomplish  any  and  all  of  its  objects  and  purposes  which  a  natural 
person  would  have. 

3.  The  number  of  shares  of  capital  stock  that  may  be  issued  by  said 
corporation  is  Three  Thousand  (3.000)  shares,  of  which  Fifteen  Hundred 
(1,500)  shares  of  the  amount  or  par  value  of  One  Hundred  Dollars  ($100) 
■each  are  to  be  preferred  stock,  and  Fifteen  Hundred  (1.500)  shares  which 
shall  have  no  nominal  or  par  value  are  to  be  common  stock. 

4.  The  holders  of  the  preferred  stock  of  the  corporation  shall  be 
paid  from  the  surplus  profits  an  annual,  cumulative,  seven  per  cent  divi- 
dend, before  any  dividend  is  paid  to  the  holders  of  common  stock  or 
other  disposition  is  made  of  such  profits,  but  shall  not  participate  in 
anv  further  dividends.  In  event  of  dissolution  or  liquidation  of  the  corpo- 
ration from  any  cause,  the  holders  of  preferred  stock  shall  be  paid,  from 
the  aa^^t.s  pi  .the  corporation,  the  par  value  of  their  stock  and  any  unpaid 


554 


FORMS   AND    PRECEDENTS 


arrearages  of  dividends  before  any  part  of  said  assets  shall  be  paid  to 
the  holders  of  common  stock.  The  holders  of  said  preferred  stock  shall 
not  be  entitled  to  vote  at  any  meetings  of  the  stockholders. 

5.  The  amount  of  capital  with  which  the  corporation  will  carry  on 
business,  shall  be  Three  Hundred  Thousand  Dollars  ($300,000). 

6.  The  shares  of  the  capital  stock  of  said  company  may  be  issued  for 
cash  or  for  property,  but  no  share  of  the  capital  stock  shall  be  issued 
for  less  than  One  Hundred  Dollars  ($100)  in  cash,  unless  two-thirds  of 
the  Board  of  Directors,  at  a  meeting  called  for  that  purpose  in  such  man- 
ner as  shall  be  prescribed  by  the  by-laws  shall  so  direct. 

7.  The  principal  office  of  said  corporation  is  to  be  located  In  the 
Borough  of  Manhattan,  New  York  City,  County  and  State  of  New  York. 

8.  The  duration  of  said  corporation  is  to  be  perpetual. 

9.  The  number  of  directors  is  to  be  ten. 

10.  The  names  and  post  office  addresses  of  the  directors  for  the 
first  year  are  as  follows : 

NAME  POST-OFFICE   ADDRESS 

Henry  A.  Davis  203  Broadway,  New  York  City 

John  H.  Williams  203  Broadway,       "         "        " 

Henry  B.  Nivens  198  Broadway,      "         "        " 

John  H.  Sharp  275  Fulton  St.,      " 

Harry  J.  Andrews  55  Liberty  St.,     "         "        " 

11.  The  names  and  post-office  addresses  of  the  subscribers  to  this 
certificate,  and  a  statement  of  the  number  of  shares  which  each  agrees 
to  take  in  the  corporation,  are  as  follows : 

NO.   OF 
NAME  POST-OFFICE    ADDRESS  SHARES 

Henry  A,  Davis      203  Broadway,  New  York  City  I 

John  H.  Williams  203  Broadway       "         "        "  I 

Henry  B.  Nivens    198  Broadway,      "         "        "  I 

In  Witness  Whereof,  the  parties  hereto  have  made,  signed, 
acknowledged,  and  filed  this  certificate  the  i8th  day  of 
December,  1917. 

Henry  A.  Davis 
John  H.  Williams 
Henry  B.  Nivens 


State  of  New  York        \         . 
County  of  New  York    j 

Personally  appeared  before  me  this  i8th  day  of  December,  1917,  Henry 
A.  Davis,  John  H.  Williams,  and  Henry  B.  Nivens,  to  me  personally  known 
to  be  the  persons  described  in  and  who  executed  the  foregoing  certificate 
and  severally  acknowledged  that  they  executed  the  same  for  the  purposes 
therein  set  forth. 

r  NOTARIAL  \  .  John  E.  Clark, 

L      seal       /  Notary  Public  for 

New  York  County 


CHAPTER    LXII 

SPECIAL  CHARTER  CLAUSES 

The  lines  of  business  directly  covered  by  the  special  char- 
ter clauses  of  the  present  chapter  are  shown  in  the  following 
index  list. 

Index  List  of  Special  Purpose  Clauses 


I. 

Amusement  Devices 

27. 

Leather 

2. 

Bonds  and  Securities 

28. 

Lighting  and  Heating 

3- 

Brick  Machinery 

29. 

Locks 

4. 

Building  Materials 

30. 

Lumber 

5. 

Cement  and  Building  Material*? 

31. 

Meat  and  Cattle 

6. 

Cloaks  and  Garments 

32. 

Metal  Working 

7. 

Clothing  Manufacturers 

33. 

Mining 

8. 

Contracting  and  Building 

34. 

Mining 

9. 

Cotton  and  Textile  Fibres 

35. 

Mining  and  Exploration 

10. 

Dairy,  Garden  and  Farm  Pro- 

36. 

Mining  and  Manufacturing 

ducts 

37. 

Oil 

II. 

Department  Store  and  Mail  Or- 

38. 

Opticians 

der 

39- 

Paints  and  Painters*  Supplies 

12. 

Drugs 

40. 

Patents 

13. 

Dry  Goods 

41. 

Periodical  or  Newspaper 

14. 

Electrical  Supply  Company 

42. 

Photographic  Apparatus 

IS- 

Engineering — Mechanical 

43- 

Pianos  and  Musical  Instruments 

16. 

Estate,  Management  of 

44. 

Printing 

17- 

Express  and  Delivery 

45. 

Railroad  Construction 

18. 

Furniture 

46. 

Real  Estate 

19. 

Gas  and  Electric  Fixtures 

47- 

Refrigerating  Company 

20. 

Hardware 

48. 

Scales  and  Weighing  Machines 

21. 

Heating  Apparatus 

49. 

Schools 

2.-2. 

Hotel 

50. 

Securities  Company 

23. 

Ice  Company 

51. 

Sugar  Business 

24. 

Insurance  Agents 

52. 

Textile  Fibres 

25. 

Inventions 

53- 

Tobacco 

26. 

Jewelry 

54. 

Toilet  Specialties 

The  charter  purpose  clauses  of  the  present  chapter  cover 
a  number  of  representative  lines  of  business.  Where  any  de- 
sired business  is  not  covered,  it  will  in  most  cases  be  possible 
to  find  among  those  given,  some  related  or  similar  purpose 
clauses  that  can  be  adapted  to  meet  the  particular  require- 
ments. 

555 


556  FORMS   AND   PRECEDENTS 

The  clauses  as  given  cover  the  specific  purposes  of  par- 
ticular businesses.  It  is  usual,  as  will  be  seen  by  reference  to 
the  charters  of  the  preceding  chapter,  to  include  in  the  ordi- 
nary charter  other  clauses  giving  general  powers  in  addition 
to  the  specific  purposes.  As  a  corporation  always  has  power 
to  do  such  legitimate  things  as  are  necessary  to  effect  the 
purposes  of  its  creation,  these  additional  clauses  are  not  as  a 
rule  strictly  necessary  but  may  be  added  where  desired. 

Form  5.     Special  Purpose  Clauses 

I — Amusement  Devices 

(a)  To  make,  instal,  and  operate,  in  the  State  of  New  York,  certain 
devices,  mechanisms,  and  apparatus  for  amusement  and  recreation,  in- 
vented by  Ward  L.  Donaldson. 

(b)  To  make,  lease,  purchase,  and  otherwise  acquire,  and  to  use 
operate,  sell,  and  license  to  use,  all  manner  of  devices,  apparatus  and  con- 
structions for  the  purpose  of  amusement  and  recreation. 

(c)  To  purchase,  lease,  exchange,  and  otherwise  acquire  any  and  all 
rights,  permits,  privileges,  franchises,  and  concessions  suitable  or  conven- 
ient for  the  purposes  of  the  Company. 


2 — Bonds  and  Securities 

(a)  To  buy,  sell,  exchange,  pledge,  mortgage,  and  generally  deal  in 
and  with  government,  municipal,  and  industrial  bonds,  stocks,  and  other 
securities,  and  in  and  with  bonds  and  mortgages  or  other  evidences  of  in- 
debtedness or  ownership  of  any  individual,  firm,  or  corporation,  and  in 
and  with  stocks,  debentures,  trust  receipts,  and  other  securities  of  corpora- 
tions, both  domestic  and  foreign;  and  while  the  owner  thereof  to  exer- 
cise the  rights  and  privileges  of  ownership,  including  the  right  to  vote 
thereon,  and  to  issue  in  exchange  therefor  its  own  stock,  bonds,  and  other 
obligations,  and  generally  to  carry  on  the  business  of  stock  and  bond 
brokers;  but  nothing  herein  shall  be  construed  as  an  attempt  to  secure 
powers  not  properly  obtainable  by  corporations  organized  under  the  Busi- 
ness Corporation  Law  of  the  State  of  New  York. 

(b)  To  deposit  in  trust  with  any  person,  firm,  or  corporation  or  cor- 
porations, any  or  all  of  said  bonds,  stocks,  or  other  securities,  and  issue 
against  such  securities  collateral  trust  gold  notes  in  any  denomination  that 
may  be  deemed  desirable  by  the  directors  of  the  company. 

(c)  To  buy,  sell,  rent,  lease,  or  otherwise  acquire,  to  hold,  own,  use, 
improve,  mortgage,  sell,  exchange,  lease,  or  otherwise  dispose  of  real  prop- 
erty, improved,  or  unimproved. 

(d)  To  register  and  certify,  or  to  guarantee,  the  genuineness  or 
authenticity  of,  or  the  payment  of  the  principal  or  interest  of  any  bonds, 
notes  or  debentures  of  any  person,  firm,  corporation,  or  association  so  far 
as  the  same  may  be  permitted  by  corporations  organized  under  the  act 
under  which  this  company  is  incorporated. 

(e)  To  borrow  money  with  or  without  pledge  of  or  mortgage  on  all 


SPECIAL   CHARTER   CLAUSES 


557 


or  any  of  its  property,  real  or  personal,  as  security,  and  to  loan  and  ad- 
vance money  upon  mortgages  on  personal  and  real  property  or  on  either 
of  them. 

3 — Brick  Machinery 

(a)  To  secure  for  the  State  of  New  York  rights  to  manufacture, 
use,  operate,  sell,  lease,  and  otherwise  dispose  of  the  brick-pressing  mech- 
anism and  machinery  invented  and  patented  by  James  D.  Warner. 

(b)  To  make,  manufacture,  buy,  sell,  and  generally  to  deal  in  and 
with  brick,  tile,  and  all  other  sand,  lime,  clay,  cement,  earthen,  mineral 
and  composition  wares,  materials,  and  manufactures. 

(c)  To  purchase,  lease,  or  otherwise  acquire  lands,  kilns,  depots, 
buildings,  warehouses,  factories,  rights,  inventions,  machinery,  and  plants 
in  the  State  of  New  York  and  elsewhere,  for  the  purpose  of  conducting 
and  carrying  on  such  manufactures  and  business. 

(d)  To  erect  or  have  erected,  to  construct  or  have  constructed, 
houses,  works,  buildings,  store-rooms,  tenements,  edifices,  and  structures 
of  every  description,  and  to  rebuild,  enlarge,  improve  and  alter  existing 
houses,  works,  buildings,  store-rooms,  tenements,  edifices,  and  structures 
of  every  description. 

(e)  To  buy,  sell,  exchange,  dig,  mine,  excavate,  prepare,  manufacture, 
and  generally  to  deal  in  and  with  all  raw  and  manufactured  substances, 
minerals,  and  materials,  necessary  or  convenient  for  the  uses,  manufac- 
tures, and  operations  of  the  corporation,  and  to  sell,  exchange,  and  other- 
wise dispose  of  and  turn  to  account  all  products  and  manufactures  result- 
ing from  the  same. 

4 — Building  Materials 

To  make,  manufacture,  buy,  sell,  import,  export,  and  generally  deal 
in  and  with  cement,  clay,  stone,  brick,  tile,  and  all  other  earthen,  mineral, 
metal,  and  construction  materials,  and  with  wares,  blocks,  and  manufac- 
tures, and  constructions  made  thereof,  and  to  deal  generally  in  and  with 
all  kinds  of  building  and  construction  materials,  supplies,  tools,  and  ma- 
chinery. 

5 — Cement  and  Building  Materials 

(a)  To  manufacture,  buy,  sell,  and  generally  to  deal  in  and  with 
cement,  lime,  plaster,  and  artificial  stone ;  and  to  erect  or  purchase  or  lease 
kilns,  store  houses,  factories,  warehouses,  and  other  structures  necessary 
for  the  conduct  of  said  business,  and  for  the  manufacture  and  storing  of 
such  materials  and  for  other  structural  materials,  supplies,  and  the  imple- 
ments and  tools  useful  in  connection  therewith. 

(b)  To  acquire,  own,  hold,  lease,  maintain,  establish,  and  operate 
quarries,  brickyards,  lime  kilns,  cement  and  plaster  mills,  and  furnaces, 
factories,  and  establishments  for  the  manufacture,  preparation,  production, 
and  adaption  of  all  kinds  of  structural  material  and  supplies,  and  for 
the  manufacture  and  repair  of  any  and  all  machinery,  tools,  implements, 
vehicles,  elevators,  apparatus,  and  appliances  used  in  or  necessary  in  the 
prosecution  of  the  said  work,  business,  and  undertaking  of  the  corpora- 
tion. 

6 — Cloaks  and  Garments 

(a)  To  manufacture  cloaks,  kimonas,  dressing  sacques,  negligees, 
gowns,  robes,  waists,  skirts,  and  all  kinds  of  garments  and  wearing  apparel 
for  men,  women,  and  children. 


558 


FORMS   AND   PRECEDENTS 


(b)  To  buy,  sell,  import,  export,  manufacture,  and  generally  deal  in 
and  with  all  kinds  of  textile  fabrics,  dry  goods,  clothing,  ornaments, 
notions,  fancy  goods,  novelties,  devices,  goods,  wares,  merchandise,  and 
commodities. 


7 — Clothing  Manufacturers 

(a)  To  conduct  and  carry  on  the  business  of  cutting  out,  making,  and 
preparing  clothing  and  wearing  apparel  of  all  kinds,  and  of  all  other 
articles  which  may  be  conveniently  or  advantageously  handled  in  connec- 
tion with  the  aforesaid  business. 

(b)  To  buy,  sell,  import,  export,  and  deal  in  and  with  woolen,  cotton, 
silk,  and  other  textile  fabrics,  and  in  any  and  all  other  materials  useful 
or  necessary  in  the  manufacture  of  clothing  and  wearing  apparel. 


8 — Contracting  and  Building 

(a)  To  make,  enter  into,  perform,  and  carry  out  contracts  for  build- 
ing, erecting,  improving,  constructing,  altering,  repairing,  decorating,  fin- 
ishing and  furnishing  houses,  buildings,  warehouses,  store-rooms,  edifices, 
works,  tenements,  and  structures  of  every  kind  and  description;  to  carry 
on  in  all  their  respective  branches  the  business  of  builders,  contractors, 
decorators,  and  such  other  trades  and  businesses  as  pertain  to  or  are  con- 
nected with  the  general  business  of  building  and  construction, 

(b)  To  take  over,  acquire,  purchase,  own,  sell,  lease,  hire,  hold,  con- 
trol, manage,  maintain,  and  operate  quarries,  brick-yards,  lime-kilns,  refin- 
eries, asphalt,  cement  and  plaster  mills,  lumber  yards,  timber  lands,  saw 
mills,  glass,  metal  and  woodworking  plants,  pulp  and  paper  mills,  furnaces, 
factories,  and  establishments  for  the  manufacture,  preparation,  and  pro- 
duction of  building  supplies,  material,  furnishings,  decorations,  and  furni- 
ture ;  and  to  buy,  sell,  and  generally  deal  in  and  with  all  such  articles  and 
materials, 

(c)  To  act  as  agents,  factors,  brokers,  commission  merchants,  car- 
riers, contractors,  builders,  architects,  decorators,  surveyors,  engineers,  ap- 
praisers, lessees,  managers  of  estate,  or  otherwise  in  entering  into,  under- 
taking, performing,  and  carrying  out  and  conducting  any  and  all  things 
set  forth  in  this  certificate  as  objects,  purposes,  or  powers  that  it  may  do 
for  itself;  and  to  exercise  its  powers  to  the  same  extent  that  natural 
persons  might  do,  and  in  any  part  of  the  world  to  the  full  extent  permitted 
to  corporations  organized  under  the  Business  Corporations  Law  of  the 
State  of  New  York, 


9 — Cotton  and  Textile  Fibres 

(a)  To  carry  on  the  business  of  buying,  selling,  storing,  ginning,  bal- 
ing, compressing,  shipping,  and  otherwise  dealing  in  and  with  cotton  of 
all  kinds ;  and  of  making,  producing,  refining,  adapting,  preparing,  buying, 
selling,  storing,  and  otherwise  dealing  in  and  with  cotton  seed  oils  and 
other  oils;  and  of  buying,  selling,  storing,  and  otherwise  dealing  in  and 
with  cotton  seed;  and  in  making,  adapting,  preparing,  buying,  selling, 
storing,  and  otherwise  dealing  in  and  with  all  products  and  by-products 
of  cotton  and  cotton  seed,  and  in  utilizing  the  same  to  the  profit  and 
advantage  of  the  corporation, 

(b)  To  grow,  purchase,  deal  in  and  with,  manufacture,  prepare  for 
market,  and  market,  cotton,  flax,  hemp,  wool,  silk,  and  other  fibrous 
materials  of  all  kinds;  to  manufacture,  deal  in  and  with  all  the  products 
and  by-products  of   said  materials  and  all  articles  or  products  or  by- 


SPECIAL   CHARTER  CLAUSES  55Q 

products  consisting  in  part  of  such  materials,  or  any  products  or  by-prod- 
ucts thereof;  to  bleach,  dye,  print,  and  otherwise  manipulate  and  treat 
in  such  manner  as  may  be  desired,  and  spin,  comb,  weave,  and  prepare 
for  market,  either  wholly  or  in  part,  and  market  and  deal  in  any  of 
such  materials,  products,  by-products  or  articles ;  and  to  do  all  things  and 
engage  in  any  and  all  kinds  of  business  and  in  all  parts  of  the  world 
which  in  the  opinion  of  the  corporation  may  be  necessary,  ancillary,  inci- 
dental, profitable,  or  proper  to  or  in  connection  with  said  business  or  any 
portion  thereof. 

(c)  To  buy,  sell,  manufacture,  operate,  and  generally  deal  in  and 
with  any  and  all  devices,  machinery,  and  apparatus  for  ginning,  baling, 
compressing,-  preparing,  or  otherwise  manufacturing  or  treating  cotton, 
flax,  hemp,  wool,  silk,  and  other  fibrous  or  other  materials ;  and  to  do  all 
business  connected  with  and  collateral  thereto,  including  the  selling,  ship- 
ping, and  warehousing  of  the  products. 

(d)  To  erect,  construct,  and  equip  cotton  storage  warehouses  and 
general  warehouses,  and  to  purchase  and  lease  the  same,  or  rights  to 
or  interests  therein,  and  to  conduct  the  business  of  storage  and  ware- 
housing, and  all  the  business  necessarily  or  impliedly  incidental  thereto 
or  profitable  in  connection  therewith,  and  to  further  carry  on  the  business 
of  general  warehousing  in  all  its  several  branches;  to  construct,  purchase, 
or  otherwise  acquire,  and  to  operate  and  maintain,  all  or  any  means  of 
conveyance  for  the  transportation  by  land  or  by  water  of  any  and  all 
products,  goods,  or  manufactured  articles  of  the  corporation;  to  issue 
negotiable  certificates,  debentures,  warrants,  and  other  evidences  of  in- 
debtedness upon  commodities  stored  in  the  corporation's  warehouses  and 
to  persons  warehousing  goods  with  the  corporation ;  and  to  make  advances 
or  loans  of  its  own  funds  or  as  the  agent  for  others  upon  the  security 
of  such  goods  or  otherwise;  to  manufacture,  sell,  and  trade  in  all  mate- 
rials, apparatus,  and  appliances  usually  dealt  in  by  warehousemen;  and 
generally  to  carry  on  and  undertake  any  business  undertaking,  transac- 
tion, or  operation  commonly  carried  on  or  undertaken  by  warehousemen, 
or  any  business  which  may,  in  the  opinion  of  the  corporation,  be  neces- 
sary, ancillary,  incidental,  profitable,  or  proper  to  or  in  the  carrying  on 
of  said  business  or  any  part  thereof,  without  any  restrictions  whatsoever. 


ID — Dairy,  Garden,  and  Farm  Products 

(a)  To  buy,  sell,  and  generally  deal  in  and  with  milk;  to  condense, 
preserve,  evaporate,  and  manufacture  butter,  cheese,  and  other  milk  prod- 
ucts; to  sell  and  handle  fresh  milk,  eggs,  butter,  and  all  kinds  of  garden, 
farm,  and  dairy  products ;  and  to  deal  generally  in  and  with  food  prod- 
ucts of  every  kind  and  description,  including  cereals  and  cereal  products, 
meats,  fish,  vegetables,  fruit  of  all  kinds  or  preserved  goods,  and  all  kinds 
and  descriptions  of  food  preparations. 

(b)  To  lease,  build,  purchase,  or  otherwise  acquire  store  houses,  pack- 
ing houses,  canning  factories  for  handling  and  storing  milk,  butter,  cheese, 
eggs,  vegetables,  poultry,  and  all  other  food,  farm  and  dairy  products,  and 
to  sell  or  otherwise  dispose  of  the  product  of  such  packing  houses  and 
factories. 

(c)  To  conduct  and  carry  on  any  other  business,  manufacturing 
or  otherwise,  which  may  seem  advantageous  or  useful  in  connection  with 
the  general  business  of  the  company,  and  to  manufacture,  market,  or 
prepare  for  market,  any  goods  or  commodities  which  the  company  may 
use  in  connection  with  its  business. 


56o  FORMS   AND   PRECEDENTS 

(d)  To  protect  the  products  of  the  company  by  trade-marks,  trade- 
names, or  any  distinguishing  name  or  title,  and  to  acquire  and  take  over 
any  trade-marks,  patent  rights,  processes,  formulae,  and  apparatus  useful 
or  convenient  in  the  conduct  of  the  said  business  of  the  corporation. 


II — Department  Store  and  Mail  Order 

(a)  To  establish,  conduct,  and  carry  on  the  general  business  of  a 
department  store  and  mail-order  business;  and  in  connection  therewith 
to  carry  on  all  or  any  of  the  trades  and  businesses  of  dry  goods  mer- 
chants, cloth  manufacturers,  furriers,  haberdashers,  hosiers,  milliners, 
dress-makers,  cloak-makers,  mantua-makers,  tailors,  hatters,  clothiers, 
furnishers,  outfitters,  glovers,  lace  manufacturers,  feather-dressers,  boot 
and  shoemakers,  saddlers,  harness-n<akers,  cabinet-makers,  upholsterers, 
jewelers,  gold  and  silversmiths,  watch  and  clock-makers,  booksellers, 
restaurant  keepers,  tobacconists,  cigar  makers,  confectioners,  barbers,  hair- 
dressers, photographers,  printers,  publishers,  engravers,  stationers,  deco- 
rators, chemists,  druggists. 

(b)  Generally  to  buy,  sell,  import,  export,  manufacture,  and  deal  in 
and  with  textile  fabrics,  leather  goods,  household  and  office  furniture 
ironmongery,  hardware,  tools,  implements,  machinery,  china,  glassware, 
crockery,  pottery  and  utensils,  notions,  fancy  goods,  soaps,  perfumery, 
drugs,  medicines,  chemicals  and  toilet  articles,  precious  stones,  jewelry, 
ornaments,  watches,  clocks,  plated  goods,  foods,  groceries,  meats,  fish,  vege- 
tables, fruits,  provisions,  supplies,  dairy  products,  candies,  confections, 
books,  periodicals,  pictures,  works  of  art,  bicycles,  motor  cycles,  automo- 
biles, motor  boats,  sporting  goods,  photographic  supplies,  domestic,  trained 
and  ifancy  animals  and  birds,  and  all  kinds  and  descriptions  of  goods,  wares, 
and  commodities. 

(c)  To  advertise  generally  in  all  manner  and  by  all  legitimate  methods ; 
to  carry  on  the  business  of  printing,  publishing,  engraving,  bookbinding, 
designing,  and  producing  and  reproducing  printing,  writing,  drawing,  and 
impressions  of  all  kinds ;  to  buy,  sell,  manufacture,  and  deal  generally 
in  and  with  paper,  envelopes,  books,  periodicals,  magazines  and  advertising, 
printed  and  duplicated  materials  of  all  kinds,  and  with  all  supplies,  sta- 
tionerj%  and  materials  useful  in  connection  with  the  business  of  adver- 
tising, printing,  and  publishing. 

(d)  To  apply  for,  obtain,  purchase,  lease,  or  otherwise  acquire,  anH 
to  register,  hold,  own,  use,  operate,  and  manufacture  under,  and  to  sell, 
assign,  grant  licenses  in  respect  of,  or  otherwise  dispose  of  and  turn 
to  account  and  profit,  any  and  all  trade-marks,  improvements,  processes, 
formulae,  trade  secrets,  rights,  franchises,  licenses,  inventions,  con- 
trivances, devices,  appliances,  brands,  labels,  patterns  and  models,  whether 
secured  under  letters  patent  in  the  United  States  or  in  any  foreign 
country,  or  otherwise  or  in  any  other  manner. 


12— Drugs 

(a)  To  prepare,  compound,  manufacture,  buy,  sell,  import,  export, 
and  generally  deal  in  and  with  drugs,  medicines,  chemicals,  perfumeries, 
soaps,  toilet  articles,  druggists'  sundries,  wines,  liquors,  mineral  and  soda 
waters,  proprietary  articles,  electrical  and  surgical  apparatus,  physicians' 
and  hospital  supplies,  and  all  kinds  of  pharmaceutical,  chemical,  and 
medicinal  preparations,  compounds,  and  materials. 

(b)  To  conduct  and  carry  on  in  all  its  branches  the  business  of 
chemists,  druggists,  and  manufacturers   and  dealers  in  medical,  chemi- 


SPECIAL   CHARTER   CLAUSES  561 

cal,  pharmaceutical  and  other  compounds,  preparations,  and  materials, 
and  in  all  supplies,  devices,  machinery,  apparatus,  and  implements  used 
in  such  business  or  in  connection  therewith. 


13 — Dry  Goods 

To  buy,  sell,  import,  export,  and  to  deal  generally  in  and  with  all 
kinds  of  textile  goods,  wares  and  merchandise :  and  to  prepare,  manu- 
facture and  deal  in  all  kinds  of  dry  goods,  cloths,  and  textile  fabrics 
and  garments  and  other  manufactures  of  the  same;  and  to  conduct 
and  carry  on  the  general  wholesale  and  retail  dry  goods  and  white 
goods  business  in  all  its  branches ;  and  to  conduct  and  carry  on  any 
form  of  manufacturing  or  mercantile  enterprise  necessary  or  incidental 
to  the  general  business  of  the  company. 


14— Ei-ECTRicAL  Supply  Company 

(a)  To  manufacture,  prepare,  construct,  erect,  install,  and  build  elec- 
trical devices,  motors,  dynamos,  meters,  supplies,  apparatus,  machinery, 
improvements,  appliances,  and  plants  of  all  descriptions ;  and  to  buy,  sell, 
import,  export,  and  generally  deal  in  and  with  the  same,  and  all  tools, 
stock,  supplies,  and  material  useful  in  connection  therewith. 

(b)  To  carry  on  the  business  of  electrical  and  mechanical  engineers; 
to  design,  construct,  enlarge,  repair,  improve,  and  manufacture  all  kinds 
of  plants,  engines,  and  machines ;  generally  to  work  and  operate  as  tool- 
makers,  brass  founders,  metal  workers,  millwrights,  machinists,  iron  and 
steel  converters,  smiths,  builders,  metallurgists ;  to  buy,  sell,  repair,  manu- 
facture, and  deal  in  machinery,  implements,  rolling  stock,  and  hardware 
of  all  kinds ;  and  to  build,  construct,  and  repair  railroads,  water,  gas,  and 
electric  works,  bridges,  viaducts,  piers,  and  works  and  structures  of  all 
kinds. 


15 — Engineering — Mechanical 

(a)  To  conduct  and  carry  on  the  business  of  mechanical  engineers, 
and  to  design  and  construct  plants,  engines,  machines,  tools,  and  apparatus 
of  all  kinds. 

(b)  To  manufacture,  buy,  sell,  and  generally  deal  in  tools,  imple- 
ments, and  machinery  and  hardware  of  all  kinds. 

(c)  To  operate  and  do  business  as  tool  makers,  brass  founders,  metal 
workers,  millwrights,  machinists,  smiths,  builders,  and  mechanical  engi- 
neers. 


16 — Estate^  Management  of 

To  take  over  and  acquire  all  or  any  part  or  interest  in  the  estate 
and  property  of  John  C.  Howard,  deceased ;  to  assume  the  payments 
of  any  notes,  indebtedness,  or  obligations  of  such  estate;  and  to  hold, 
improve,  lease,  sell,  and  otherwise  handle  and  dispose  of  the  said  estate 
and  property  as  may  appear  to  the  advantage  and  profit  of  the  corpora- 
tion. 


17 — Express  and  Delivery 

(a)  To  collect,  receive,  distribute,  and  deliver  goods,  merchandise, 
parcels,  packages,  baggage,  and  express  matter,  and  to  do  a  general  cart- 
age and  delivery  business  in  the  City  of  Greater  New  York  and  else- 
where: to  contract  with  express  or  railroad  or  other  companies  for  the 


562  FORMS   AND   PRECEDENTS 

collection,  transportation,  or  distribution  of  goods,  merchandise,  freight 
and  express  matter  in  said  city  and  elsewhere,  and  to  perform  all  such 
contracts. 

(b)  To  buy,  sell,  manufacture,  and  otherwise  acquire,  and  to  use, 
repair,  store,  opeYate,  lease,  let  out,  and  otherwise  employ  and  utilize  cars, 
trucks,  wagons,  and  other  vehicles  and  conveyances  designed  for  the 
carriage  and  transportation  of  goods,  freight,  and  merchandise  of  all 
kinds. 

(c)  To  do  a  general  trucking  and  expressing  business;  to  receive, 
handle,  ship,  forward,  and  transport  goods,  wares,  merchandise,  and 
freight  of  all  kinds  by  land  or  water. 


18 — Furniture 

(a)  To  manufacture,  buy,  sell,  export,  import,  exchange,  and  generally 
deal  in  and  with  all  kinds  of  house,  store,  office,  and  other  furniture, 
carpets,  curtains,  fixtures,  and  furnishing  goods. 

(b)  To  engage  generally  in  the  business  of  furnishing,  decorating, 
improving,  and  altering  rooms,  houses,  stores,  offices,  and  all  kinds  of 
halls,  buildings,  and  apartments. 

(c)  To  purchase,  lease,  or  otherwise  acquire  and  hold  lands,  build- 
ings, tenements,  and  factories  for  the  offices,  workshops,  and  store-rooms 
of  the  company,  and  to  lease,  mortgage,  and  convey  such  real  estate  in 
such  manner  as  may  appear  for  the  best  interests  of  the  company. 


19 — Gas  and  Electric  Fixtures 

(a)  To  manufacture,  buy,  sell,  import,  export,  and  generally  deal 
in  and  with  gas  and  electrical  fixtures,  lamps,  lamp  shades,  globes,  pen- 
dants, chandeliers,  lambrequins,  and  gas  and  electrical  attachments  of 
all  kinds. 

(b)  To  buy.  sell,  import,  export,  prepare,  and  utilize  glass,  wood, 
metal,  cloths,  silks,  leathers,  and  other  materials  for  the  manufacture 
of  such  gas,  lamp,  and  electrical  fixtures,  and  to  do  all  things  necessary 
or  convenient  in  connection  with  such  utilization. 


20 — Hardware 

(a)  To  buy,  sell,  import,  export,  and  generally  deal  in  and  with  all 
kinds  of  tools,  hardware,  and  machinery;  to  establish,  maintain,  and 
operate  shops  and  factories  for  the  manufacture  and  construction  of  all 
kinds  of  tools,  hardware,  machines,  and  mechanical  construction. 

(b)  To  buy,  sell,  and  generally  to  deal  in  iron,  steel,  manganese, 
copper,  zinc,  brass,  and  other  metals,  and  in  any  and  all  articles  made 
of  or  partly  consisting  of  metal,  wood,  and  other  materials,  and  to 
engage  in  the  repair  and  manufacture  of  all  goods,  wares,  and  commodities 
dealt  in  by  the  corporation. 


21 — Heating  Apparatus 

(a)  To  manufacture  gas,  oil.  and  electric  stoves,  heating  apparatus, 
cooking  apparatus,  lighting  apparatus,  and  all  devices  for  the  utilization 
of  gas,  oil,  and  electricity  and  other  agencies  for  cooking,  lighting,  and 
heating,  together  with  all  parts,  fixtures,  instruments,  mechanisms,  attach- 
ments, and  machinery,  incident  to,  or  appertaining  to,  or  to  be  used 
in  connection  with  gas,  oil,  electricity,  or  other  agencies  used  for  the 
purposes  of  the  business  of  this  Company. 

(b)  To  apply  for,  obtain,  purchase,  or  otherwise  acquire,  and  to  reg- 


SPECIAL   CHARTER   CLAUSES 


563 


ister,  patent,  or  otherwise  secure,  any  and  all  trade-marks,  inventions, 
devices,  improvements,  and  appliances,  patented  or  otherwise,  relating  to, 
or  applicable  to,  the  use  of  gas,  oil,  electricity,  or  other  agencies  for  cook- 
ing, heating,  or  lighting,  or  capable  of  being  used  in  connection  therewith; 
to  own,  hold,  use,  operate,  manufacture  under,  introduce,  sell,  assign,  or 
otherwise  dispose  of  the  same;  and  to  do  all  other  things  as  may  be 
necessary  or  desirable  to  acquire,  use,  dispose  of,  and  turn  to  account,  any 
and  all  such  patents,  licenses,  trade-marks,  improvements,  devices,  and 
appliances. 

(c)  To  carry  on  the  trade  or  business  of  buying,  selling,  renting,  leas- 
ing, producing,  preparing,  adapting,  manufacturing,  and  otherwise  dealing 
in  any  and  all  kinds  of  gas,  oil,  and  electrical  devices,  fixtures,  mechanisms, 
machines,  novelties,  and  supplies,  and  hardware  of  all  kinds  and  descrip- 
tions, and  of  all  materials,  raw  and  manufactured,  useful  or  desirable  in 
connection  with  or  relating  to  such  trade  or  business;  and  to  carry  on 
any  other  manufacturing  or  mercantile  business  that  can  be  advan- 
tageously conducted  in  connection  with  the  said  business. 

22 — Hotel 

(a)  To  plan,  design,  and  construct  buildings  for  hotel  purposes  or  to 
buy,  sell,  and  acquire  the  same ;  to  conduct  and  carry  on  such  hotel  or 
hotels  for  the  accommodation  of  the  public ;  and  to  rent  private  rooms, 
suites,  and  all  accommodation  necessary  for  that  purpose. 

(b)  To  conduct  and  carry  on  the  business  of  buying  and  selling  cigars 
and  tobacco,  of  providing  meals  and  food  for  the  general  public,  and  to 
buy  all  things  necessary  in  connection  therewith. 

(c)  To  purchase,  lease,  or  otherwise  acquire  lands,  buildings,  and  real 
estate  for  hotel  use;  and  to  lease,  mortgage,  and  convey  such  real  estate 
in  such  manner  as  may  appear  to  the  best  interests  of  the  corporation. 


23 — Ice  Company 

(a)  To  manufacture,  buy,  sell,  store,  and  generally  deal  in  and  with 
ice  and  refrigerating  material  and  supplies,  and  to  transact  all  legitimate 
business  incidental  thereto  or  in  anywise  connected  therewith. 

(b)  To  carry  on  the  business  of  refrigerating,  cold  storage,  and  gen- 
eral warehousing  and  all  the  business  necessarily  or  impliedly  incidental 
thereto;  to  manufacture,  sell,  and  trade  in  all  goods  usually  dealt  in  by 
warehousemen ;  to  construct,  hire,  purchase,  operate,  and  maintain  all 
or  any  conveyances  for  the  transportation  in  cold  storage  or  otherwise 
by  land  or  water  of  any  or  all  products,  goods,  or  manufactured  articles; 
and  to  do  all  things  incidental  to  the  business  of  cold  storage  and  ware- 
housing. 


24 — Insurance  Agents 

To  conduct  and  carry  on  as  agents  or  brokers  the  business  of  marine, 
fire,  life,  accident,  fidelity,  employment,  burglary,  credit,  plate-glass,  steam- 
boiler,  title,  and  all  other  kinds  and  classes  of  insurance. 

25 — Inventions 

(a)  To  acquire  the  United  States  rights  for  the  system  of  automatic 
signals  devised  by  Henry  H.  Hardy  of  South  Orange,  New  Jersey,  to- 
gether with  the  inventions,  processes,  apparatus  and  devices  included  there- 
under or  connected  therewith;  to  take  over  such  United  States  letters 
patent  as  may  already  have  been  issued  for  such  inventions  and  improve- 


564 


FORMS   AND   PRECEDENTS 


ments  thereon;  to  procure  United  States  letters  patent  for  such  other 
inventions  and  improvements  as  are  not  already  so  protected;  to  hold  all 
such  letters  patent,  and  to  operate  and  manufacture  thereunder,  or  to 
grant  licenses  in  respect  thereof,  or  to  sell  and  assign  the  said  patents, 
in  whole  or  in  part;  or  to  dispose  otherwise  of  and  turn  to  account  any 
or  all  of  the  same  in  such  manner  as  may  in  the  judgment  of  its  Board 
of  Directors  be  for  the  best  interests  of  the  Company. 


26 — ^Jewelry 

(a)  To  manufacture,  buy,  sell,  import,  export,  and  generally  deal  in 
and  with  gold  and  silver  ware,  watches,  jewelry,  precious  stones,  opera 
glasses,  chains,  umbrellas,  silver  and  plated  ware,  gold  and  silver  orna- 
ments, and  all  goods,  wares,  and  merchandise  usually  dealt  in  by  watch 
makers  and  jewelers. 

(b)  To  manufacture,  repair,  regulate,  and  put  in  order  watches,  clocks, 
jewelry,  and  gold  and  silver  ware  of  all  kinds;  and  to  plate,  polish,  and 
perform  all  operations  necessary  in  connection  with  the  handling  of  jew- 
elers' goods,  wares,  and  supplies. 

27 — Leather 

(a)  To  manufacture,  produce,  and  otherwise  prepare,  and  to  buy  and 
otherwise  acquire,  sell,  store,  transport,  distribute,  dispose  of,  and  deal  in 
and  with  (i)  leather,  lumber,  belting,  and  any  and  all  other  merchandise 
and  commodities  of  whatsoever  nature  and  character;  and  (2)  any  and  all 
materials,  machinery,  appliances,  products,  and  supplies  proper  or  adapted 
to  be  used  in  or  in  connection  with  or  incidental  to  the  manufacture,  pro- 
duction, or  preparation  of  any  of  the  articles,  merchandise,  and  commodi- 
ties aforesaid;  and  also  (3)  any  and  all  commodities  and  things  which 
result  from  or  are  by-products  of  the  manufacture,  production,  or  prepa- 
ration of  leather,  lumber,  belting,  or  other  merchandise  or  articles,  or  in 
the  manufacture,  production,  or  preparation  of  which  any  of  the  said  arti- 
cles may  be  a  factor  or  an  ingredient,  or  of  which  the  same  may  be  a 
component  part. 

(b)  To  engage  in  any  other  manufacturing,  warehousing,  trading,  or 
selling  business  of  any  kind  or  character  whatsoever. 

(c)  To  acquire,  dispose  of,  lease,  and  utilize,  in  the  manner  and  to 
the  extent  permitted  by  law,  lands,  timber,  bark,  tanneries,  mills,  ware- 
houses, plants,  and  other  buildings  and  structures,  machinery,  supplies, 
and  any  and  all  articles  and  property,  including  good-will,  which  the  cor- 
poration may  deem  to  be  necessary  or  convenient  to  the  attainment  or 
furtherance  of  any  of  its  objects. 

(d)  To  hold,  purchase,  or  otherwise  acquire,  or  be  interested  in  and 
to  sell,  assign,  pledge,  or  otherwise  dispose  of,  shares  of  the  capital  stock, 
bonds,  or  other  evidences  of  debt  issued  or  created  by  any  other  corpora- 
tion, whether  foreign  or  domestic  and  whether  now  or  hereafter  organ- 
ized; and  while  the  holder  of  any  such  shares  of  stock  to  exercise  all  the 
rights  and  privileges  of  ownership,  including  the  right  to  vote  thereon, 
to  the  same  extent  as  a  natural  person  might  or  could  do. 


28 — Lighting  and  Heating 

(a)  To  manufacture,  buy,  sell,  and  lease  gas,  oil,  and  electric  de- 
vices, mechanisms,  and  apparatus,  for  the  production  of  light,  heat,  and 
power,  and  of  all  such  piping,  conductors,  and  accessories  as  are  usual  in 
connection  therewith. 


SPECIAL   CHARTER  CLAUSES 


565 


(b)  To  manufacture,  buy,  sell,  and  deal  in  all  kinds  of  goods,  wares, 
tools,  fixtures,  and  appliances  that  may  be  useful  in  the  production  or  utili- 
zation of  light,  heat,  and  power  from  any  source. 

(c)  To  construct,  equip,  and  install  engines,  power  plants,  machines, 
apparatus,  and  appliances  for  the  manufacture,  production,  generation,  and 
supplying  of  gas,  light,  heat,  power,  electricity,  or  other  motive  power;  and 
to  maintain,  repair,  improve,  control,  and  operate  the  same. 

29 — Locks 

(a)  To  acquire  the  inventions  and  improvements  of  Owen  T.  Hart- 
well  relating  to  locks  and  locking  devices ;  to  manufacture  under  the  same ; 
and  to  sell  and  dispose  of  the  locks  and  devices  so  manufactured. 

(b)  To  manufacture,  buy,  sell,  import,  export,  and  generally  deal  in 
and  with  locks,  fastenings,  and  attachments  used  in  connection  therewith. 

(c)  To  apply  for,  obtain,  purchase,  or  otherwise  acquire,  and  to  reg- 
ister, hold,  own,  and  sell  or  otherwise  dispose  of,  trade-marks,  improve- 
ments, inventions,  processes,  formulae,  trade  secrets,  and  apparatus  of  all 
kinds,  whether  secured  under  letters  patent  of  the  United  States  or  any 
foreign  country,  or  in  any  other  manner. 


30 — Lumber 

(a)  To  purchase  or  otherwise  acquire,  and  to  hold,  lease,  and  sell  tim- 
ber, mineral,  and  other  lands  and  the  products  thereof;  to  build,  con- 
struct, and  operate  shops,  sawmills,  and  factories  for  the  handling  of  all 
timber  and  lumber  and  for  planing,  dressing,  and  preparing  the  various 
products  of  such  lands  for  market;  to  buy,  sell,  import,  export,  and 
generally  deal  and  trade  in  wood,  lumber,  logs,  and  timber  and  brick, 
stone,  lime,  and  other  building  materials. 

(b)  To  conduct  and  transact  its  said  business  in  any  of  the  states, 
territories,  colonies,  or  dependencies  of  the  United  States,  and  in  any  and 
all  foreign  countries,  to  have  one  or  more  offices  therein,  and  therein  to 
conduct  its  said  business. 


31 — Meat  and  Cattle 

(a)  To  buy,  sell,  import,  export,  and  deal  in  and  with  meat,  live  cattle, 
pigs,  and  sheep  at  wholesale  or  retail,  in  the  United  States  or  elsewhere, 
and  to  carry  on  the  said  trade  or  business  of  dealing  in  meats  and  meat 
products  in  all  its  branches ;  to  erect  and  build  abattoirs,  cold  storage 
warehouses,  sheds,  slaughter  houses,  packing  houses,  and  other  structures 
necessary  or  convenient  for  the  purposes  of  the  company. 

(b)  To  slaughter  cattle,  pigs,  and  sheep;  to  preserve  meat  and  pro- 
ducts thereof ;  to  buy,  sell,  and  generally  deal  in  hides,  fats,  tallow,  grease, 
and  animal  products. 


32 — Metal  Working 

(a)  To  work  and  operate  as  welders,  tool-makers,  brass  founders, 
metal  workers,  machinists,  smiths,  model-makers,  and  metallurgists. 

(b)  To  design,  construct,  enlarge,  repair,  improve,  and  manufacture 
all  kinds  of  tools,  parts,  motors,  machines,  engines,  devices,  mechanisms, 
apparatus,  and  inventions  of  all  kinds. 

(c)  To  buy,  sell,  lease,  alter,  repair,  store,  use,  operate,  manufacture, 
and  deal  in  and  with  tools,  motors,  engines,  machines,  dynamos,  appli- 
ances, and  apparatus  relating  to  or  useful  in  connection  with  motor 
vehicles  or  motor  machinery. 


566  FORMS   AND   PRECEDENTS 

33 — Mining 

(a)  To  dig,  mine,  acquire,  or  otherwise  construct  or  remove  clay, 
stone,  coal,  ores,  and  other  minerals,  metals,  and  timber  from  any  lands 
owned,  acquired,  leased,  or  occupied  by  the  Company,  or  from  any  other 
lands  in  which  the  Company  may  have  legal  rights. 

(b)  To  buy  and  sell,  or  otherwise-  deal  with  or  to  traffic  in  iron, 
steel,  manganese,  copper  and  other  metals,  and  cement,  wood,  lumber,  and 
other  materials,  and  any  products  thereof,  and  any  articles  consisting  or 
partly  consisting  thereof. 

(c)  To  engage  in  any  other  manufacturing,  mining,  construction,  or 
transportation  business  of  any  kind  or  character  whatsoever,  and  to  that 
end  to  acquire,  hold,  own,  and  dispose  of  any  and  all  property,  assets, 
stocks,  bonds,  and  rights  of  any  and  every  kind;  but  not  to  engage  in  any 
business  hereunder  which  shall  require  the  exercise  of  the  right  of  eminent 
domain  within  the  State  of  New  Jersey, 

(d)  To  acquire  by  purchase,  subscription,  or  otherwise,  and  to  hold 
or  to  dispose  of  stocks,  bonds,  or  any  other  obligations  of  any  corpora- 
tion formed  for,  or  then  engaged  in  or  pursuing,  any  one  or  more  of 
the  kinds  of  business,  purposes,  objects,  or  operations  above  indicated,  or 
owning  or  holding  any  property  of  any  kind  herein  mentioned;  or  of  any 
corporation  owning  or  holding  the  stock  or  the  obligations  of  any  such 
corporation. 


34 — Mining 

(a)  To  buy,  lease,  or  otherwise  acquire  mines,  mining  rights,  quar- 
ries, and  mineral  lands  of  every  kind,  nature,  and  description,  and  to  work, 
mine,  prospect,  develop,  operate,  and  promote  the  same;  to  mine,  quarry, 
and  excavate  copper,  gold,  silver,  and  other  ores  and  metals  and  minerals 
of  all  descriptions. 

(b)  To  buy,  lease,  construct,  own,  control,  operate,  and  maintain  mills, 
works,  and  plants  for  the  crushing,  sampling,  milling,  smelting,  reduction, 
and  concentration  of  minerals  and  metal-bearing  ores,  and  the  extraction 
therefrom  of  all  kinds  of  metals  and  mineral  products  and  by-products, 
on  its  own  account  and  as  factor  and  agent  for  others. 

(c)To  treat,  prepare,  and  manufacture,  and  to  buy,  sell,  and  generally 
to  deal  in  iron,  steel,  manganese,  coke,  copper,  lumber,  and  other  materi- 
als, and  all  or  any  articles  consisting  of  or  partly  consisting  of  metal, 
wood,  or  other  materials,  and  any  and  all  products  and  by-products  thereof  j 


35 — Mining  and  Exploration 

(a)  To  buy,  lease,  or  otherwise  acquire  mines,  mining  rights,  quar- 
ries, and  mineral  lands  and  claims  of  every  kind,  nature,  and  description, 
and  to  work,  mine,  prospect,  develop,  and  promote  the  same;  to  mine, 
quarry,  and  excavate  gold,  silver,  copper,  and  other  ores  and  metals  and 
minerals  of  all  descriptions. 

(b)  To  carry  on  the  business  of  mining,  milling,  concentrating,  con- 
verting, smelting,  treating,  preparing  for  market,  reducing,  buying,  selling, 
and  merchandising  in  gold,  silver,  copper,  and  other  metals  and  metallic 
compounds,  coal,  coke,  charcoal,  and  other  fuels,  and  all  products  and  by- 
products of  all  ores  and  minerals ;  but  not  to  buy  gold  or  silver  bullion  or 
foreign  coins. 

(c)  To  buy,  sell,  manufacture,  produce,  and  dispose  of  all  kinds  of 
goods,  wares,  merchandise,  manufactures,  commodities,  food  stuffs,  'drugs, 


SPECIAL   CHARTER  CLAUSES  567 

furniture,  machinery,  tools,  supplies,  and  agricultural  products,  and  gener- 
ally to  engage  in  and  carry  on  any  forms  of  manufacturing  or  mercan- 
tile enterprise,  necessary  or  incidental  to  the  business  of  the  Company. 

(d)  To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines, 
cars,  and  other  equipment,  railroads,  docks,  slips,  elevators,  water  works, 
gas  works,  electric  works,  viaducts,  aqueducts,  canals,  and  other  water- 
ways, and  any  other  means  of  transportation ;  and  to  sell  the  same,  or  oth- 
erwise dispose  thereof;  or  to  maintain  and  operate  the  same,  except  that 
the  company  shall  not  maintain  or  operate  any  railroad  or  canal  in  the 
State  of  New  Jersey. 

36— Mining  and  Manufacturing 

To  engage  in  mining  of  all  kinds;  manufacturing  of  all  kinds;  trans- 
portation of  goods,  merchandise,  or  passengers,  upon  land  or  water ;  build- 
ing houses,  structures,  vessels,  ships,  boats,  railroads,  engines,  cars,  or  other 
equipment,  wharves,  or  docks;  constructing,  maintaining,  and  operating 
railroads  (other  than  railroads  within  the  State  of  New  Jersey),  steamship 
lines,  vessel  lines,  or  other  lines  for  transportation ;  the  purchase,  improve- 
ment, or  sale  of  lands. 


37— Oil 

(a)  To  buy,  lease,  or  otherwise  acquire  grants,  rights,  powers,  and 
privileges  in  connection  with  oil  and  mineral  lands,  and  to  work,  bore  for, 
prospect,  develop,  operate,  and  promote  the  same;  to  pump,  prepare  for 
market,  refine,  and  treat  all  oil  and  mineral  substances  secured  from  the 
said  land. 

(b)  To  buy,  sell,  produce,  transport,  store,  and  export  crude  petro- 
leum and  all  its  products,  and  to  do  all  things  necessary  for  the  transpor- 
tation, storage,  refining,  and  selling  of  the  same. 

(c)  In  other  states  and  jurisdictions  to  have  one  or  more  offices,  and 
to  carry  on  all  or  any  part  of  its  operations  and  business,  and  unlimitedly 
and  without  restriction  to  hold,  purchase,  mortgage,  lease,  and  convey  real 
and  personal  property  as  allowed  by  the  laws  of  such  states  and  jurisdic- 
tions. 

(d)  For  the  purposes  of  its  said  business  to  enter  into,  make,  per- 
form, and  carry  out  contracts  of  every  sort  and  kind  necessary  or  inci- 
dental to  the  purposes  of  this  Company,  with  any  person,  firni,  association, 
or  corporation,  whether  private,  public,  or  municipal,  or  with  any  body 
politic,  and  with  the  government  of  any  country  or  any  state,  territory, 
or  colony  thereof. 


38 — Opticians 

(a)  To  buy,  sell,  manufacture,  and  generally  to  deal  in  and  with 
lenses,  glasses,  mirrors,  and  reflectors  of  all  kinds  and  descriptions ;  and 
to  grind,  polish,  mount,  and  prepare  the  same  for  use  in  optical,  surgical, 
medical,  dental,  photographic,  electrical,  and  scientific  and  mechanical 
work,  and  instruments  of  all  kinds. 

(b)  To  buy,  sell,  manufacture,  and  generally  to  deal  in  and  with 
optical,  scientific,  surgical,  medical,  dental,  and  experimental  tools,  appli- 
ances, apparatus,  instruments,  reflectors,  microscopes,  telescopes,  spy- 
glasses, opera  glasses,  magnifying  glasses,  spectacles,  cameras,  magic  lan- 
terns, stereopticons,  stereoscopes,  and  similar  wares  and  merchandise  of 
all  sorts  and  descriptions. 


S68 


FORMS  AND  PRECEDENTS 


39 — Paints  and  Painters'  Supplies 

(a)  To  manufacture,  prepare,  and  sell  oils,  turpentine,  paints,  painters* 
supplies,  and  kindred  articles. 

(b)  To  buy,  sell,  import,  export,  and  generally  deal  in  and  with  paints, 
oils,  turpentine,  and  painters'  supplies  of  all  kinds. 

(c)  To  buy,  manufacture,  lease,  and  sell  all  raw  materials,  mills, 
machinery,  and  other  articles  useful  or  convenient  in  connection  with  the 
said  business  herein  mentioned. 


40 — Patents 

To  apply  for,  purchase,  or  otherwise  acquire,  and  to  hold,  own.  use. 
operate,  and  to  sell,  assign,  or  otherwise  to  dispose  of,  to  grant  licenses 
in  respect  of  or  otherwise  turn  to  account,  any  and  all  inventions,  improve- 
ments, and  processes  used  in  connection  with,  or  secured  under  letters 
patent  of  the  United  States  or  elsewhere,  or  otherwise;  and,  with  a  view 
to  the  working  and  development  of  the  same,  to  carry  on  any  business 
whether  manufacturing  or  otherwise,  which  the  corporation  may  think  cal- 
culated directly  or  indirectly  to  effectuate  these  objects. 


41 — Periodical  or  Newspaper 

(a)  To  take  over  the  publication  known  as  the .  Cambridge  Monthly 
Magazine ;  to  print,  publish,  and  issue  the  same ;  to  secure  and  publish 
news  and  literary  material  suitable  for  the  said  periodical;  and  to  do  all 
things  necessary  in  connection  with  its  publication  and  distribution. 

(b)  Generally  to  carry  on  the  business  of  owning  and  publishing  news- 
papers, magazines,  and  other  periodicals;  and  in  connection  therewith  to 
carry  on  business  as  printers,  bookbinders,  stationers,  photographers,  lith- 
ographers, and  such  other  businesses  or  manufactures  as  may  be  con- 
venient or  necessary. 

(c)  To  purchase,  build,  lease,  construct,  or  otherwise  acquire  such 
buildings,  offices,  plants,  and  machinery  as  may  be  necessary  or  useful  to 
carry  out  the  objects  and  purposes  of  this  company. 

42 — Photographic  Apparatus 

To  buy,  sell,  manufacture,  and  generally  deal  in  and  with  cameras, 
tripods,  dry  plates,  films,  photographic  chemicals,  sensitized  papers,  plate- 
holders,  screens,  slides,  printing  frames,  and  all  other  apparatus,  devices, 
supplies,  and  materials  used  in  the  art  of  photography  or  in  connection 
therewith. 


43 — Pianos  and  Musical  Instruments 

To  buy,  sell,  import,  export,  and  generally  deal  in  and  with  pianos, 
organs,  and  other  musical  instruments;  and  in  all  things,  fixtures,  furni- 
ture, and  appliances  useful  or  convenient  in  connection  with  the  said  busi- 
ness for  the  use  of  musical  instruments;  to  manufacture,  buy,  sell,  import, 
and  export  any  and  all  kinds  of  musical  instruments,  materials,  and  sup- 
plies for  the  same,  musical  articles,  furniture,  cases,  or  conveniences  used 
in  the  production  of  music,  or  in  connection  with  the  operation  of  musi- 
cal instruments. 

44 — Printing 

(a)  To  buy,  sell,  manufacture,  and  carry  on  the  business  of  printers, 
publishers,  stationers,  engravers,  designers ;  and  to  engage  generally  in  the 
art,  trade,  and  business  of  printing,  engraving,  lithographing,  and  all  other 


SPECIAL   CHARTER   CLAUSES  ^69 

methods  of  printing,  or  producing  or  reproducing  printing,  engraving, 
drawings,  paintings,  pictures,  and  representations  and  impressions  of  all 
kinds  in  color  or  otherwise. 

(b)  To  print,  publish,  bind,  and  buy,  sell,  and  deal  in  books,  papers, 
magazines,  periodicals,  and  advertising  and  printed  matter  of  all  kinds; 
to  hold,  use,  sell,  circulate,  distribute,  and  dispose  of  the  same;  and  gen- 
erally to  do  all  things  incidental  to  or  connected  with  the  business  of 
printing  and  publishing. 

(c)  To  buy,  sell,  rent,  manufacture,  install,  use,  operate,  and  gener- 
ally deal  in  and  with  machines,  mechanisms,  devices,  apparatus,  inventions, 
and  irnprovements  for  printing,  writing,  duplicating,  type-setting,  type-mak- 
ing, linotyping,  casting,  or  making  type,  making  printing  slugs,  plates, 
platens,  stereotypes,  and  all  other  things  for  use  in  or  in  connection  with 
the  printers'  art,  trade,  and  business. 

(d)  To  apply  for,  obtain,  purchase,  or  otherwise  acquire,  and  to  regis- 
ter, hold,  own,  use,  operate,  sell,  assign,  or  otherwise  dispose  of  and  turn 
to  account  and  profit,  any  and  all  trade-marks,  improvements,  processes, 
formulae,  trade  secrets,  inventions,  and  apparatus  of  all  kinds,  whether  se- 
cured under  letters  patent  of  the  United  States  or  in  any  foreign  country, 
or  in  any  other  manner. 

(e)  To  apply  for,  obtain,  purchase,  or  otherwise  acquire,  and  to  own, 
hold,  use,  sell,  assign,  or  otherwise  dispose  of  and  turn  to  profit  and  ac- 
count, copyrights  and  publishing  rights  of  all  kinds. 


45 — Railroad  Construction 

(a)  To  do  all  things  necessary  or  useful  in  connection  with  the  con- 
struction of  railways,  railway  bridges,  and  railway  terminals,  and  the  doing 
of  all  things  and  the  making  of  all  contracts  for  such  construction. 

(b)  To  deal  in  stocks,  bonds,  and  other  securities  of  railroad  com- 
panies, and  to  purchase,  hold,  pledge,  and  sell  the  same. 

(c)  To  buy,  sell,  and  deal  in  real  estate,  rights  of  way,  and  the  sell- 
ing or  leasing  of  the  same. 

(d)  To  promote  and  organize  railroad  corporations,  to  sell  their 
stocks  and  other  ^securities,  and  to  secure  finance  for  their  construction. 

(e)  To  acquire  franchises,  concessions,  rights  of  way,  and  other  privi- 
leges to  be  utilized  for  railroads  or  railroad  construction. 


46 — Real  Estate 

(a)  To  take,  lease,  purchase,  or  otherwise  acquire,  and  to  own,  use, 
hold,  sell,  convey,  exchange,  lease,  mortgage,  work,  improve,  develop, 
cultivate,  and  otherwise  handle,  deal  in,  and  dispose  of  real  estate,  real 
property,  and  any  interest  or  right  therein. 

(b)  To  take,  purchase,  or  otherwise  acquire,  and  to  own,  hold,  sell, 
convey,  exchange,  hire,  lease,  pledge,  mortgage,  and  otherwise  deal  in  and 
dispose  of  all  kinds  of  personal  property,  chattels,  chattels  real,  choses  in 
action,  notes,  bonds,  mortgages,  and  securities. 

(c)  To  convert  and  appropriate  any  land  that  may  be  acquired  or  be 
lawfully  controlled  by  this  corporation,  into  and  for  ways,  roads,  paths, 
streets,  alleys,  sidewalks,  parks,  gardens,  boulevards,  and  pleasure  grounds ; 
and  generally  to  deal  with,  manage,  improve,  and  administer  the  lands 
owned  and  controlled  by  the  corporation  or  entrusted  to  its  care. 

(d)  To  erect  or  have  erected,  to  construct  or  have  constructed,  houses, 
works,  buildings,  store-rooms,  factories,  tenements,  edifices,  and  structures 
of  every  description;  and  to  rebuild,  enlarge,  improve,  and  alter  existing 


570  FORMS   AND   PRECEDENTS 

houses,  works,  buildings,  store-rooms,  tenements,  edifices,  and  structures 
of  every  description ;  and  to  buy,  sell,  own,  use,  manage,  and  lease  the  same 
or  similar  structures. 

(e)  To  warrant  the  title  to  lands  or  to  any  estate  or  interest  in  lands 
sold  by  said  corporation ;  to  issue  notes,  bonds,  and  debentures  secured 
by  mortgage  or  deed  of  trust  upon  the  property  of  said  corporation  or 
otherwise ;  and  to  sell  and  dispose  of  the  same  for  the  benefit  of  the  corpo- 
ration or  for  any  lawful  purpose. 

(f)  To  make,  enter  into,  perform  and  carry  out,  contracts  for  con- 
structing, building,  altering,  improving,  repairing,  decorating,  maintaining, 
furnishing,  and  fitting  up  buildings,  tenements,  and  structures  of  every  de- 
scription ;  and  to  advance  money  to,  and  to  enter  into  agreements  of  all 
kinds  with  builders,  contractors,  property  owners,  and  others  for  said  pur- 
poses. 

(g)  To  collect  rents  and  make  repairs,  and  transact,  on  commission 
or  otherwise,  the  general  business  of  a  real  estate  agent,  and,  generally, 
the  sale,  leasing,  control,  and  management  of  lands,  buildings,  and  prop- 
erty of  all  kinds. 


47 — Refrigerating  Company 

(a)  To  plan,  design,  lay  out,  construct,  and  contract  to  install  plants, 
machinery,  factories,  and  apparatus  for  mixing,  making,  freezing,  prepar- 
ing, and  marketing  ices,  ice-creams,  and  all  kinds  of  frozen  and  refrigerated 
substances. 

(b)  To  contract  and  undertake  the  planning,  designing,  manufacture, 
and  construction  of  ice,  cold  storage,  and  refrigerating  plants,  machinery, 
apparatus,  and  conveyances,  and  of  all  buildings,  structures,  piping,  and 
storing  facilities  necessary  or  pertaining  thereto. 

(c)  To  carry  on  a  general  contracting  and  engineering  business  in  all 
its  branches;  particularly  to  carry  on  the  business  of  refrigerating  en- 
gineering; and  to  design,  erect,  construct,  enlarge,  repair,  improve,  and 
manufacture  all  kinds  of  ice,  cold  storage,  and  refrigerating  plants,  en- 
gines, machinery,  insulation,  and  apparatus. 

(d)  To  carry  on  the  business  of  ice-making,  cold  storage,  refrigera- 
tion, and  making  ice-cream,  and  do  all  things  incidental  thereto ;  to  buy. 
sell,  construct,  operate,  and  maintain  ice  plants,  cold  storage  warehouses, 
refrigerating  apparatus,  and  conveyances  for  the  transportation  in  cold 
storage  of  all  goods,  products,  and  wares. 


48— Scales  and  Weighing  Machines 

(a)  To  manufacture,  buy,  sell,  import,  export,  and  generally  deal  in 
and  with  scales,  weighing  machines,  and  mechanical  devices  for  measuring, 
weighing,  and  recording  data  as  to  the  weight  and  measurements  of  all 
kinds  of  goods,  substances,  commodities,  and  merchandise. 

(b)  To  acquire  patent  rights,  trade-marks,  licenses,  and  all  other  rights 
relating  to  scales,  weighing  machines,  measuring  and  recording  devices, 
and  tools,  mechanisms,  and  machinery  useful  in  connection  therewith  and 
the  manufacture  thereof;  to  manufacture,  and  operate  under  the  same, 
and  to  license  others  to  manufacture  and  operate  under  the  same,  and 
turn  the  same  to  profit  in  all  lawful  ways. 


49 — Schools 

To  establish  and  conduct  a  school  or  schools ;  to  provide  courses  of 
study  preparatory  for  business  or  professional  life  or  for  general  culture; 


SPECIAL   CHARTER   CLAUSES  571 

to  establish  classical,  mathematical,  scientific,  business,  technical,  and  gen- 
eral courses  of  study;  to  conduct  institutes,  lectureships,  training  schools, 
courses  of  study,  and  home  classes;  to  provide  for  the  holding  and  giving 
of  lectures,  exhibitions,  public  meetings,  and  conferences  adapted  directly 
or  indirectly  to  advance  the  calling  of  education;  to  secure,  print,  and 
publish  books  and  courses  of  study  suitable  for  use  in  connection  with 
the  schools  and  courses  of  study  of  this  corporation. 


50 — Securities  Company 

(a)  To  buy,  sell,  hold,  and  generally  to  deal  in  and  with  stocks,  bonds, 
debentures,  mortgages,  and  securities  of  all  kinds;  to  borrow  money, 
make  loans,  advance  money  on  contracts,  make  investments,  and  generally 
act  as  investment  brokers ;  to  issue  notes,  bonds,  securities,  and  deben- 
tures which  may  be  secured  by  mortgage  or  otherwise  upon  property 
real  and  personal  of  the  corporation  under  the  provisions  of  Section  2 
of  the  Stock  Corporations  Law  of  the  State  of  New  York;  and  to  pur- 
chase, hold,  improve,  sell,  lease,  or  exchange  real  estate. 

(b)  To  act  as  agents,  factors,  brokers,  commission  merchants,  con- 
tractors, lessees,  and  managers  of  estates  or  otherwise  in  entering  into, 
undertaking,  performing,  negotiating,  executing,  conducting,  and  trans- 
acting for  persons,  firms,  and  corporations  upon  commission  or  otherwise, 
any  and  all  the  things  set  forth  in  this  certificate  that  it  can  do  for  itself ; 
and  to  exercise  all  of  its  powers  to  the  same  extent  that  a  natural  person 
might  do,  and  in  any  part  of  the  world  to  the  full  extent  permitted  to  cor- 
porations organized  under  the  Business  Corporations  Law  of  the  State  of 
New  York. 

(c)  To  purchase,  acquire,  hold,  and  dispose  of  the  stocks,  bonds,  and 
other  evidences  of  indebtedness  of  any  corporation,  domestic  or  foreign, 
and  issue  in  exchange  therefor  its  stock,  bonds,  or  other  obligations;  and 
to  exercise  while  owner  of  the  stock  of  other  corporations  all  the  rights, 
powers,  and  privileges  of  ownership,  including  the  right  to  vote  thereon. 

(d)  To  guarantee  or  cause  to  be  guaranteed  the  payment  of  dividends 
or  interest  on  any  bonds,  stocks,  debentures,  or  other  securities  of  this  cor- 
poration; and  to  guarantee  or  cause  to  be  guaranteed  the  contracts  and 
obligations  of  this  corporation  whenever  proper  or  necessary  for  its  busi- 
ness in  the  judgment  of  its  Board  of  Directors. 


51 — Sugar  Business 

(a)  To  conduct  and  carry  on  the  business  of  manufacturing,  produc- 
ing, importing,  refining,  preparing,  and  shipping  sugar,  sugar  cane,  syrups, 
and  all  products  and  by-products  thereof. 

(b)  To  purchase,  lease,  and  construct  refineries,  buildings,  and  other 
structures  and  buildings  useful  in  connection  with  the  said  business  of 
refining,  preparing,  and  dealing  in  sugar  and  sugar  products. 

(c)  To  construct,  purchase,  or  otherwise  secure  steamships,  steam- 
boats, and  sailing  vessels,  and  such  docks,  wharves,  and  terminal  facilities 
as  may  be  convenient  or  necessary  to  the  business  of  the  company. 

(d)  To  carry  on  the  business  of  warehousing,  and  to  do  all  business 
necessary  and  incidental  thereto. 


52 — Textile  Fibres 

(a)  To  buy,  sell,  grow,  prepare,  manufacture,  and  generally  deal  in 
and  with  flax,  hemp,  jute,  wool,  silk,  cotton,  and  fibres  and  fibrous  mate- 
rials of  all  kinds;  to  buy,  sell,  prepare,  manufacture,  and  generally  deal  in 


5^2  FORMS  AND   PRECEDENTS 

all  products  and  by-products  of  said  materials  and  substances,  or  products 
and  by-products  consisting  in  part  of  such  materials  and  substances;  to 
bleach,  dye,  print,  color,  and  otherwise  treat  and  manipulate,  and  to  spin, 
comb,  weave,  and  prepare  for  market,  either  wholly  or  in  part ;  and  to  buy, 
sell,  market,  and  deal  in  any  and  all  such  products,  by-products,  materials, 
manufactures,  and  substances;  and  to  do  all  other  things  and  engage  in 
any  and  all  kinds  of  business  which  may  be  necessary,  ancillary,  incidental, 
profitable,  or  convenient  in  connection  with  said  business  or  any  portion 
thereof. 

(b)  To  buy,  sell,  own,  hold,  use,  operate,  and  generally  to  deal  in 
and  with  all  devices,  machines,  mechanisms,  and  engines  that  may  be 
useful  or  convenient  in  the  treatment,  preparation,  manufacture,  and 
manipulation  of  flax,  hemp,  jute,  wool,  silk,  cotton,  and  other  fibres  and 
fibrous  materials  of  all  kinds. 


53 — Tobacco 

To  buy,  manufacture,  sell,  lease,  let,  and  hire,  machines  and  machinery, 
tools,  implements  and  appliances,  and  all  other  property,  real  or  personal, 
useful  or  available,  in  the  manufacture,  cultivation,  care,  or  treatment  of 
any  form  of  tobacco  and  its  products  and  by-products ;  and  articles  and 
materials  in  any  wise  relating  thereto  or  connected  therewith. 


54— Toilet  Specialties 

(a)  To  prepare,  manufacture,  and  sell  the  facial  preparation  known 
as  "Rose  Creme,"  and  generally  to  buy,  sell,  manufacture,  prepare,  and 
deal  in  and  with  fine  perfumeries,  toilet  preparations,  and  all  such  drugs, 
unguents,  chemicals,  and  other  materials  as  may  be  used  or  handled  in 
connection  therewith. 

(b)  To  buy,  sell,  combine,  prepare,  manufacture,  and  generally  to 
deal  in  and  with  all  manner  of  chemicals,  chemical  products,  drugs,  and 
pharmaceutical  compounds  and  preparations  thereof;  and  to  patent,  reg- 
ister, or  otherwise  protect  the  same. 


CHAPTER    LXIII 

BY-LAW  FORMS 

Form  6.     By-Laws — Simple  Form 

By-Laws 

of  the 

COLLINGWOOD   TOOL   COMPANY 

New  York  City 


Article  I — Stock 

1.  Certificates  of  Stock  shall  be  issued  to  each  holder  of  full-paid 
stock,  in  numerical  order,  from  the  stock  certificate  book,  be  signed  by  the 
President  and  Treasurer,  and  sealed  by  the  Secretary  with  the  corporate 
seal.    A  record  of  each  certificate  issued  shall  be  kept  on  the  stub  thereof. 

2.  Transfers  of  Stock  shall  be  made  only  upon  the  books  of  the  Com- 
pany, and  before  a  new  certificate  is  issued  the  old  certificate  must  be 
surrendered  for  cancellaton.  The  stock  books  of  the  Company  shall  be 
closed  for  transfer  twenty  days  before  general  elections  and  ten  days 
before  dividend  days. 

3.  The  Treasury  Stock  of  the  Company  shall  consist  of  such  issued 
and  outstanding  stock  of  the  Company  as  may  be  donated  to  the  Company 
or  otherwise  acquired,  and  shall  be  held  subject  to  disposal  by  the  Board 
of  Directors.  Such  stock  shall  neither  vote  nor  participate  in  dividends 
while  held  by  the  Company. 

Article  II — Stockholders 

1.  The  Annual  Meeting  of  the  Stockholders  of  this  Company  shall  be 
held  in  the  principal  office  of  the  Company,  in  New  York  City,  on  the  sec- 
ond Monday  in  January  of  each  year,  at  12  m.,  if  not  a  legal  holiday;  but  if 
a  legal  holiday,  then  on  the  next  business  day  following. 

2.  Special  Meetings  of  the  stockholders  may  be  called  at  the  principal 
office  of  the  Company  at  any  time  by  resolution  of  the  Board  of  Directors, 
or  upon  written  request  of  stockholders  holding  one-third  of  the  outstand- 
ing stock. 

3.  Notice  of  Meetings,  written  or  printed,  for  every  regular  or  special 
meeting  of  the  stockholders,  shall  be  prepared  and  mailed  to  the  last 
known  post-office  address  of  each  stockholder  not  less  than  ten  days  be- 
fore any  such  meeting,  and  if  for  a  special  meeting,  such  notice  shall  state 
the  object  or  objects  thereof.  No  failure  of  or  irregularity  of  notice  of 
any  regular  meeting  shall  invalidate  such  meeting  or  any  proceeding 
thereat. 

4.  A  Quorum  at  any  meeting  of  the  stockholders  shall  consist  of  a 
majority  of  the  voting  stock  of  the  Company,  represented  in  person  or  by 

573 


^74  FORMS   AND   PRECEDENTS 

proxy.     A  majority  of  such  quorum  shall  decide  any  question  that  may 
come  before  the  meeting. 

5.  The  Election  of  Directors  shall  be  held  at  the  annual  meeting  of 
stockholders,  and  shall,  after  the  first  election,  be  conducted  by  two  inspec- 
tors of  election,  appointed  by  the  President  for  that  purpose.  The  election 
shall  be  by  ballot,  and  each  stockholder  of  record  shall  be  entitled  to  cast 
one  vote  for  each  share  of  stock  held  by  him. 

6.  The  Order  of  Business  at  the  annual  meeting,  and,  as  far  as  possi- 
ble, at  all  other  meetings  of  the  stockholders,  shall  be : 

1.  Calling  of  Roll 

2.  Proof  of  Due  Notice  of  Meeting 

3.  Reading  and  Disposal  of  Any  Unapproved  Minutes 

4.  Annual  Reports  of  Officers  and  Committees 

5.  Election  of  Directors 

6.  Unfinished  Business 

7.  New  Business 

8.  Adjournment 

Article  III— Directors 

1.  The  Business  and  Property  of  the  Company  shall  be  managed  by  a 
Board  of  seven  Directors,  who  shall  be  stockholders  and  who  shall  be 
elected  annually  by  ballot  by  the  stockholders  for  the  term  of  one  year, 
and  shall  serve  until  the  election  and  acceptance  of  their  duly  qualified 
successors.  Any  vacancies  may  be  filled  by  the  Board  for  the  unexpired 
term.     Directors  shall  receive  no  compensation  for  their  services  as  such. 

2.  The  Regular  Meetings  of  the  Board  of  Directors  shall  be  held  in  the 
principal  office  of  the  Company  in  New  York  City  on  the  third  Tuesday  of 
each  month,  at  3  p.m.,  if  not  a  legal  holiday;  but  if  a  legal  holiday,  then 
on  the  next  business  day  following. 

3.  Special  Meetings  of  the  Board  of  Directors,  to  be  held  in  the  prin- 
cipal office  of  the  Company  in  New  York  City,  may  be  called  at  any  time 
by  the  President,  or  by  any  three  members  of  the  Board,  or  may  be  held 
at  any  time  and  place  without  notice,  by  unanimous  written  consent  of  all 
the  members,  or  with  the  presence  and  participation  of  all  members  at  such 
meeting. 

4.  Notices  of  both  regular  and  special  meetings  shall  be  mailed  by  the 
Secretary  to  each  member  of  the  Board  not  less  than  five  days  before  any 
such  meeting,  and  notices  of  special  meetings  shall  state  the  purposes 
thereof.  No  failure  or  irregularity  of  notice  of  any  regular  meeting  shall 
invalidate  such  meeting  or  any  proceeding  thereat. 

5.  A  Quorum  at  any  meeting  shall  consist  of  a  majority  of  the  entire 
membership  of  the  Board.  A  majority  of  such  quorum  shall  decide  any 
question  that  may  come  before  the  meeting. 

6.  Officers  of  the  Company  shall  be  elected  by  ballot  by  the  Board  of 
Directors  at  their  first  meeting  after  the  election  of  Directors  each  year. 
If  any  office  becomes  vacant  during  the  year,  the  Board  of  Directors  shall 
fill  the  sanie  for  the  unexpired  term.  The  Board  of  Directors  shall  fix  the 
compensation  of  the  officers  and  agents  of  the  Company. 

7.  The  Order  of  Business  at  any  regular  or  special  meeting  of  the 
Board  of  Directors  shall  be : 

1.  Reading  and  Disposal  of  Any  Unapproved  Minutes 

2.  Reports  of  Officers  and  Committees 

3.  Unfinished  Business 

4.  New  Business 

5.  Adjournment 


BY-LAW    FORMS 


Article  IV — Officers 


S7S 


1.  The  Officers  of  the  Company  shall  be  a  President,  a  Vice-President, 
a  Secretary,  and  a  Treasurer,  who  shall  be  elected  for  one  year  and  shall 
hold  office  until  their  successors  a*re  elected  and  qualify.  The  position  of 
Secretary  and  Treasurer  may  be  united  in  one  person. 

2.  The  President  shall  preside  at  all  meetings,  shall  have  general  super- 
vision of  the  affairs  of  the  Company,  shall  sign  or  countersign  all  certifi- 
cates, contracts,  and  other  instruments  of  the  Company  as  authorized  by 
the  Board  of  Directors;  shall  make  reports  to  the  Directors  and  stock- 
holders and  perform  all  such  other  duties  as  are  incident  to  his  office  or 
are  properly  required  of  him  by  the  Board  of  Directors.  In  the  absence 
or  disability  of  the  President,  the  Vice-President  shall  exercise  all  his 
functions. 

3.  The  Secretary  shall  issue  notices  for  all  meetings,  shall  keep  their 
minutes,  shall  have  charge  of  the  seal  and  the  corporate  books,  shall  sign, 
with  the  President,  such  instruments  as  require  such  signature,  and  shall 
make  such  reports  and  perform  such  other  duties  as  are  incident  to  his 
office,  or  are  properly  required  of  him  by  the  Board  of  Directors. 

4.  The  Treasurer  shall  have  the  custody  of  all  moneys  and  securities 
of  the  Company  and  shall  keep  regular  books  of  account  and  balance  the 
same  each  month.  He  shall  sign  or  countersign  such  instruments  as  re- 
quire his  signature,  shall  perform  all  duties  incident  to  his  office  or  that 
are  properly  required  of  him  by  the  Board,  and  shall  give  bond  for  the 
faithful  performance  of  his  duties  in  such  sum  and  with  such  sureties 
as  may  be  required  by  the  Board  of  Directors. 

Article  V — Dividends  and  Finance 

1.  Dividends  shall  be  declared  only  from  the  surplus  profits  at  such 
times  as  the  Board  of  Directors  shall  direct,  and  no  dividend  shall  be 
declared  that  will  impair  the  capital  of  the  Company. 

2.  The  Moneys  of  the  Company  shall  be  deposited  in  the  name  of  the 
Company  in  such  banks  or  trust  companies  as  the  Board  of  Directors  shall 
designate,  and  shall  be  drawn  out  only  by  check  signed  by  the  Treasurer 
and  countersigned  by  the  President. 

Article  VI — Seal 

I.  The  Corporate  Seal  of  the  Company  shall  consist  of  two  concentric 
circles  between  which  is  the  name  of  the  Company,  and  in  the  centre  shall 
be  inscribed  "Incorporated  1917,  New  York,"  and  such  seal,  as  impressed 
on  the  margin  hereof,  is  hereby  adopted  as  the  Corporate  Seal  of  the 
Company. 

Article  VII — Amendments 

1.  These  By-Laws  may  be  amended,  repealed,  or  altered,  in  whole  or  in 
part,  by  a  majority  vote  of  the  entire  outstanding  stock  of  the  Company,  at 
any  regular  meeting  of  the  stockholders,  or  at  any  special  meeting  where 
such  action  has  been  announced  in  the  call  and  notice  of  such  rneeting. 

2.  The  Board  of  Directors  may  adopt  additional  by-laws  in  harmony 
therewith,  but  shall  not  alter  nor  repeal  any  by-laws  adopted  by  the  stock- 
holders of  the  Company. 


576  FORMS   AND   PRECEDENTS 

Form  7.     By-Laws — Extended  Form 

By-Laws 
of  the 
HAMILTON    SILK   MILLS   COMPANY 
Incorporated  under  the  Laws  of  New  Jersey 


Article  i — Stock 
Sec.  I.  Certificates  of  Stock 

Each  stockholder  of  the  company  whose  stock  has  been  paid  for  in 
full  shall  be  entitled  to  a  certificate  or  certificates  showing  the  amount  of 
stock  of  the  Company  standing  on  the  books  in  his  name.  Each  certificate 
shall  be  numbered,  bear  the  signatures  of  the  President  and  Treasurer  and 
the  seal  of  the  Company,  and  be  issued  in  numerical  order  from  the  stock 
certificate  book.  A  full  record  of  each  certificate  of  stock,  as  issued,  must 
be  entered  on  the  corresponding  stub  of  the  stock  certificate  book. 

Sec.  2.  Transfers  of  Stock 

Transfers  of  stock  shall  be  made  upon  the  proper  stock  books  of  the 
Company,  and  must  be  accompanied  by  the  surrender  of  the  duly  indorsed 
certificate  or  certificates  representing  the  transferred  stock.  Surrendered 
certificates  shall  be  cancelled  and  attached  to  the  corresponding  stubs  in 
the  stock  certificate  book  and  new  certificates  issued  to  the  parties  entitled 
thereto.  The  stock  books  shall  be  closed  to  transfers  twenty  days  before 
general  elections  and  twenty  days  before  dividend  days. 

Sec.  3.  Lost  Certificates 

The  Board  of  Directors  may  order  a  new  certificate  or  certificates  of 
stock  to  be  issued  in  the  place  of  any  certificate  or  certificates  of  the  Com- 
pany alleged  to  have  been  lost  or  destroyed,  but  in  every  such  case  the 
owner  of  the  lost  certificate  or  certificates  shall  first  cause  to  be  given  to 
the  Company  a  bond  in  such  sum,  not  less  than  the  par  value  of  such  lost 
or  destroyed  certificate  or  certificates  of  stock,  as  said  Board  may  direct, 
as  indemnity  against  any  loss  or  claim  that  the  Company  may  incur  by 
reason  of  such  issuance  of  stock  certificates;  but  the  Board  of  Directors 
may,  in  their  discretion,  refuse  to  replace  any  lost  certificate,  save  upon 
the  order  of  some  court  having  jurisdiction  in  such  matter. 

Sec.  4.  Stock  and  Transfer  Books 

The  stock  and  transfer  books  of  the  Company  shall  be  kept  in  its  prin- 
cipal office.  No.  525  Main  Street,  East  Orange,  New  Jersey,  and  shall  be 
open  during  business  hours  to  the  inspection  of  any  stockholder  of  the 
Company.  All  other  books  and  records  of  the  Company  shall  be  kept  in 
its  office  in  New  York  City,  and  shall  include  a  stock  book,  which  shall  be 
open  during  business  hours  to  the  inspection  of  any  stockholder  or  judg- 
ment creditor  of  the  Company. 

Sec.  S.  Preferred  Stock 

The  capital  stock  of  this  Company  shall  be  One  Hundred  Thousand 
Dollars,  consisting  of  One  Thousand  Shares,  each  of  the  par  value  of  One 


BY-LAW  FORMS  ^77 

Hundred  Dollars.     Of  these,   Five  Hundred   Shares   shall  be  preferred 
stock,  and  Five  Hundred  Shares  shall  be  common  stock. 

Said  preferred  stock  shall  receive  from  the  net  earnings  of  the  Com- 
pany a  six  per  cent  annual  cumulative  dividend  before  any  dividends  are 
paid  upon  the  common  stock,  but  such  stock  shall  not  entitle  the  holders 
thereof  to  vote  at  the  meetings  of  the  stockholders  of  the  Company. 

Sec.  6.  Treasury  Stock 

All  issued  and  outstanding  stock  of  the  Company  that  may  be  donated 
to  or  be  purchased  by  the  Company  shall  be  treasury  stock,  and  shall  be 
held  subject  to  disposal  by  the  action  of  the  Board  of  Directors.  Such 
stock  shall  neither  vote  nor  participate  in  dividends  while  held  by  the 
Company. 

Article  II — Stockholders 

Sec.  I.  Annual  Meetings 

The  regular  annual  meetings  of  the  stockholders  shall  be  held  in  the 
office  of  the  Company,  at  No.  525  Main  Street,  East  Orange,  New  Jersey, 
at  12  M.,  on  the  second  Monday  of  January  in  each  year,  if  not  a  legal 
holiday;  but  if  a  legal  holiday,  then  on  the  next  business  day  following. 
At  this  meeting  the  Directors  for  the  ensuing  year  shall  be  elected,  the 
officers  of  the  Company  shall  present  their  annual  reports,  and  the  Secre- 
tary shall  have  on  file  for  inspection  and  reference  an  alphabetical  list  of 
the  stockholders,  giving  the  amount  of  stock  held  by  each,  as  shown  by  the 
stock  books  of  the  Company  twenty  days  before  the  date  of  such  annual 
meeting. 

Sec.  2.  Special  Meetings 

Special  meetings  of  the  stockholders  may  be  held  at  any  time,  in  the 
office  of  the  Company,  pursuant  to  a  resolution  of  the  Board  of  Directors, 
or  by  a  call  signed  by  stockholders  holding  a  majority  of  the  voting  stock 
of  the  Company.  Calls  for  special  meetings  shall  specify  the  time,  place, 
and  object  or  objects  thereof,  and  no  other  business  than  that  specified  in 
the  call  shall  be  considered  at  any  such  meeting. 

Sec.  3.  Notice  of  Meetings 

A  written  or  printed  notice  of  every  regular  or  special  meeting  of  the 
stockholders,  stating  the  time  and  place,  and,  in  case  of  special  meetings, 
the  objects  thereof,  shall  be  prepared  and  mailed  by  the  Secretary,  postage 
prepaid,  to  the  last  known  post-office  address  of  each  stockholder,  at  least 
ten  days  before  the  date  of  any  such  meeting.  No  failure  or  irregularity 
of  notice  of  any  regular  meeting  shall  invalidate  the  same  or  any  proceed- 
ing thereat. 

Sec.  4.  Voting 

Only  stockholders  of  record  shall  be  entitled  to  vote  at  the  regular  and 
special  meetings  of  stockholders.  At  such  meetings  each  stockholder  shall 
be  entitled  to  one  vote  for  each  share  of  stock  held  in  his  name. 

Sec.  S.  Election  of  Directors 

At  the  first  meeting  of  the  stockholders  a  Board  of  seven  Directors 
shall  be  elected,  who  shall  serve  until  the  election  and  acceptance  of  their 
duly  qualified  successors.  Thereafter,  at  each  annual  meeting  of  the  stock- 
holders of  the  Company,  seven  Directors  shall  be  elected,  who  shall  serve 


578 


FORMS  AND  PRECEDENTS 


until  the  election  and  acceptance  of  their  duly  qualified  successors.  All 
elections  for  Directors  shall  be  by  ballot,  and  the  candidates,  to  the  number 
to  be  elected,  receiving  the  highest  number  of  votes,  shall  be  declared 
elected. 

If  for  any  reason  Directors  are  not  elected  at  the  regular  meeting  of 
stockholders,  a  special  meeting  shall  be  called  for  the  purpose  within  thirty 
days  thereafter,  at  vi^hich  Directors  shall  be  elected  in  all  respects  as  at 
the  annual  meeting. 

Two  inspectors  of  election  shall  be  appointed  by  the  President  to  con- 
duct the  election  of  Directors  to  serve  for  the  ensuing  year.  These  inspec- 
tors shall  be  sworn  to  the  faithful  discharge  of  their  duty  and  shall  then 
take  charge  of  the  election.  No  person  who  is  a  candidate  for  the  office 
of  Director  shall  act  as  an  inspector  of  election. 

Sec.  6.  Quorum 

A  majority  of  the  outstanding  stock,  exclusive  of  treasury  stock,  shall 
be  necessary  to  constitute  a  quorum  at  meetings  of  stockholders.  When  a 
quorum  is  present  at  any  meeting,  a  majority  of  the  stock  represented 
thereat  shall  decide  any  question  brought  before  such  meeting.  In  the 
absence  of  a  quorum  those  present  may  adjourn  the  meeting  from  day  to 
day,  but  until  a  quorum  is  secured  may  transact  no  business. 

Sec.  7.  Proxies 

Any  stockholder  entitled  to  vote  may  be  represented  at  any  regular  or 
special  meeting  of  stockholders  by  a  duly  executed  proxy.  Proxies  shall 
be  in  writing  and  properly  signed,  but  shall  require  no  other  attestation. 
No  proxy  shall  be  recognized  unless  executed  within  eleven  months  of  the 
date  of  the  meeting  at  which  it  is  presented. 

Sec.  8.   Officers  of  Meetings 

The  President,  if  present,  shall  preside  at  all  meetings  of  the  stock- 
holders. In  his  absence,  the  next  officer  in  due  order  who  may  be  present 
shall  preside.  For  the  purposes  of  these  by-laws,  the  due  order  of  officers 
shall  be  as  follows :  President,  Vice-President,  and  Treasurer. 

The  Secretary  of  the  Company  shall  keep  a  faithful  record  of  the 
proceedings  of  all  stockholders'  meetings. 

Sec.  9.  Order  of  Business 

The  order  of  business  at  the  annual  meeting,  and,  so  far  as  practi- 
cable, at  all  other  meetings  of  the  stockholders,  shall  be  as  follows : 

1.  Calling  of  Roll. 

2.  Proof  of  Due  Notice  of  Meeting 

3.  Reading  and  Disposal  of  Any  Unapproved  Minutes 

4.  Annual  Reports  of  Officers  and  Committees 

5.  Election  of  Directors 

6.  Unfinished  Business 

7.  New  Business 

8.  Adjournment 

Article  III — DrcEcroRS 

Sec.  I.  Number  and  Authority 

A  Board  of  seven  Directors  shall  be  elected,  who  shall  have  entire 
charge  of  the  property,  interests,  business,  and  transactions  of  the  Com- 
pany, with  full  power  and  authority  to  manage  and  conduct  the  same. 


BY-LAW   FORMS  579 

Sec.  2.  Qualifications 

No  person  shall  be  elected,  nor  shall  be  competent  to  act  as  a  Director 
of  this  Company,  unless  he  is  at  the  time  of  election  the  holder  of  record 
of  at  least  one  share  of  its  stock.  At  least  one  of  the  Directors  of  the 
Company  must  be  a  resident  in  the  State  of  New  Jersey. 

Sec.  3.  Vacancies 

Any  vacancy  occurring  in  the  Board  of  Directors  may  be  filled  for  the 
unexpired  term  by  a  majority  vote  of  the  remaining  members.  In  event 
of  the  membership  of  the  Board  falling  below  the  number  necessary  for 
a  quorum,  a  special  meeting  of  the  stockholders  shall  be  called  and  such 
number  of  Directors  shall  be  elected  thereat  as  may  be  necessary  to  re- 
store the  membership  of  the  Board  to  its  full  number. 

Sec.  4.  Regular  Meetings 

The  regular  meetings  of  the  Board  of  Directors  shall  be  held  in  the 
office  of  the  Company,  in  the  City  of  New  York,  at  3  p.  m.,  on  the  second 
Monday  of  each  month,  if  not  a  legal  holiday;  but  if  a  legal  holiday, 
then  on  the  next  business  day  following. 

Sec.  5.  Special  Meetings 

Special  meetings  of  the  Board  of  Directors  may  be  held  at  any  time, 
in  the  office  of  the  Company,  in  the  City  of  New  York,  on  the  written  call 
of  the  President  or  of  any  three  members  of  the  Board.  Special  meetings 
may  be  held  at  any  time  and  place  and  without  notice,  by  unanimous  con- 
sent of  the  Board. 

Sec.  6.  Notice  of  Meetings 

The  Secretary  shall  notify  each  member  of  the  Board  of  all  regular 
or  special  meetings,  by  mailing  to  each  member's  last  known  post-office 
address,  postage  prepaid,  at  least  five  days  before  any  such  meeting,  a 
written  or  printed  notice  thereof,  giving  the  time,  place,  and,  in  case  of 
special  meetings,  the  objects  thereof,  and  no  other  business  shall  be  con- 
sidered at  any  such  meeting  than  shall  have  been  so  notified  to  the  mem- 
bers. No  failure  or  irregularity  of  notice  of  any  regular  meeting  shall 
invalidate  the  same  or  any  proceeding  thereat. 

Sec.  7.  Quorum 

A  majority  of  the  Board  of  Directors  shall  constitute  a  quorum,  and 
a  majority  of  the  members  in  attendance  at  any  Board  meeting  shall,  in 
the  presence  of  a  quorum,  decide  its  action.  A  minority  of  the  Board 
present  at  any  regular  or  special  meeting  may,  in  the  absence  of  a  quorum, 
adjourn  to  a  later  date,  but  may  not  transact  any  business  until  a  quorum 
has  been  secured. 

Sec.  8.  Election  of  Officers 

At  the  first  meeting  of  the  Board  of  Directors  after  the  election  of 
Directors  each  year,  a  President,  Vice-President,  Secretary,  Treasurer, 
and  General  Manager  shall  be  elected  to  serve  for  the  ensuing  year  and 
until  the  election  of  their  respective  successors.  Election  shall  be  by  ballot, 
and  a  majority  of  the  votes  cast  shall  be  necessary  to  elect.  If  not  detri- 
mental to  the  business  or  operations  of  the  Company,  any  two  offices 
may  be  conferred  upon  one  person.  The  Directors  shall  fix  the  compensa- 
tion of  officers,  subject  to  the  limitations  of  the  Charter  and  the  By-Laws. 
Any  vacancies  that  occur  may  be  filled  by  the  Board  for  the  unexpired 


58o 


FORMS   AND   PRECEDENTS 


term.    The  Board  shall  have  the  right  to  remove  any  officer  for  cause  by 
a  two-thirds  vote  of  the  entire  membership  of  the  Board. 

Sec.  9.  Compensation  of  Directors 

Each  Director  shall  receive  the  sum  of  five  dollars  as  compensation 
for  his  attendance  at  any  regular  or  special  meeting  of  the  Board  of  Di- 
rectors, and  shall  receive  no  other  salary  or  compensation  for  his  services 
as  a  Director  of  the  Company. 

Sec.  10.  Power  to  Pass  By-Laws 

The  Board  of  Directors  shall  have  no  power  to  amend,  alter,  or  re- 
peal the  by-laws,  but  may  pass  such  additional  by-laws  in  conformity 
therewith  as  may  be  necessary  or  convenient  to  facilitate  the  business  of 
the  Company. 

Sec.  II.  Executive  Committee 

The  President,  Vice-President,  and  Treasurer  shall  together  constitute 
an  Executive  Committee,  which  shall  be  a  part  of  the  permanent  executive 
organization  of  the  Company,  and  shall,  in  the  interim  between  meetings 
of  the  Board  of  Directors,  exercise  all  the  powers  of  that  body,  in  accord- 
ance with  the  general  policy  of  the  Company  and  the  directions  of  the 
Board. 

Meetings  of  the  Executive  Committee  shall  be  held  on  call  of  the 
President,  or  of  any  two  members  of  the  Committee.  All  of  the  members 
of  the  Committee  must  be  duly  notified  of  meetings,  and  a  majority  of 
the  members  shall  constitute  a  quorum.  The  Executive  Committee 
shall  keep  due  record  of  all  meetings  and  actions  of  the  Committee,  and 
such  records  shall  at  all  times  be  open  to  the  inspection  of  any  Director. 

Sec.  12.  Corporation  Offices 

The  principal  office  of  the  Company  within  the  State  of  New  Jersey 
shall  be  at  525  Main  street,  East  Orange,  and  the  agent  therein  and  in 
charge  thereof  upon  whom  process  may  be  served  shall  be  the  Registra- 
tion and  Trust  Company.  An  office  shall  also  be  maintained  in  New  York 
City,  and  such  other  offices  for  the  transaction  of  its  business  shall  be 
maintained  at  such  other  places  in  or  outside  of  said  State,  as  may  be  deter- 
mined upon  by  the  Board  of  Directors. 

Sec.  13.  Order  of  Business 

The  regular  order  of  business  at  meetings  of  the  Board  of  Directors 
shall  be  as  follows : 

1.  Reading  and  Disposal  of  Any  Unapproved  Minutes 

2.  Reports  of  Officers  and  Committees 

3.  Unfinished  Business 

4.  New  Business 

5.  Adjournment 

Article  IV— Officers 

Sec.  I.  Enumeration,  Election,  and  Qualification 

The  officers  of  the  Company  shall  be  a  President,  Vice-President, 
Treasurer,  Secretary,  and  General  Manager.  These  officers  shall  be  elected 
by  the  Board  of  Directors  at  the  first  regular  meeting  after  the  election 
of  directors  each  year,  and  shall  hold  office  for  the  term  of  one  year,  and 
until  their  respective  successors  are  duly  elected  and  quaUfy.    The  Presi- 


BY-LAW  FORMS  581 


dent  and  Vice-President  shall  be  elected  from  among  the  Board  of  Di- 
rectors. 

Sec.  2.  The  President 

The  President,  when  present,  shall  preside  at  all  meeting-  of  the  stock- 
holders and  of  the  Board  of  Directors;  shall  sign  all  certificates  of  stock; 
shall  sign  or  countersign,  as  may  be  necessary,  all  such  bills,  notes,  checks, 
contracts,  and  other  instruments  as  may  pertain  to  the  ordinary  course  of 
the  Company's  business ;  and  sign,  when  duly  authorized  thereto,  all  con- 
tracts, orders,  deeds,  liens,  licenses,  and  other  instruments  of  a  special 
nature. 

He  may  also,  in  the  absence  or  disability  of  the  Treasurer,  indorse 
checks,  drafts,  and  other  negotiable  instruments  for  deposit  or  collection, 
and  sh?ll,  with  the  Secretary,  sign  the  minutes  of  all  meetings  over  which 
he  may  have  presided. 

At  the  first  regular  meeting  of  the  Board  in  January  he  shall  submit 
a  complete  report  of  the  operations  of  the  Company  for  the  preceding  year, 
together  with  a  statement  of  the  Company's  affairs  as  existing  at  the  close 
of  such  year,  and  shall  submit  a  similar  report  at  the  annual  meeting  of 
stockholders ;  also  he  shall  report  to  the  Board  of  Directors,  from  time 
to  time,  all  such  matter  coming  within  his  notice  and  relating  to  the 
interests  of  the  Company  as  should  be  brought  to  the  attention  of  the 
Board. 

He  shall  be,  ex  officio,  a  member  of  all  standing  committees,  shall  have 
such  usual  powers  of  supervision  and  management  as  may  pertain  to  the 
office  of  President,  and  perform  such  other  duties  as  may  be  properly 
required  of  him  by  the  Board  of  Directors. 

Sec.  3.  The  Vice-President 

The  Vice-President  shall  familiarize  himself  with  the  affairs  of  the 
Company,  and,  in  the  absence,  disability,  or  refusal  to  act  of  the  President, 
shall  possess  all  of  the  powers  and  perform  all  of  the  duties  of  that  officer. 

Sec.  4.  The  Secretary 

The  Secretary  shall  keep  full  minutes  of  all  meetings  of  the  stock- 
holders and  of  the  Board  of  Directors;  shall  read  such  minutes  at  the 
proper  subsequent  meetings ;  shall  issue  all  calls  for  meetings  and  notify 
all  officers  and  directors  of  their  election ;  shall  have  charge  of  and  keep 
the  seal  of  the  corporation,  and  affix  the  same  to  certificates  of  stock  when 
such  certificates  are  signed  by  the  President  and  Treasurer,  and  shall  affix 
the  seal,  attested  by  his  signature,  to  such  other  instruments  as  may  re- 
quire the  same. 

He  shall  keep  the  stock  certificate  book  and  the  other  usual  corpora- 
tion books,  and  shall  prepare,  record,  transfer,  issue,  seal,  and  cancel 
certificates  of  stock,  as  required  by  the  transactions  of  the  Company  and 
its  stockholders.  He  shall  also  sign  with  the  President  all  contracts,  deeds, 
licenses,  and  other  instruments  when  so  ordered. 

He  shall  make  such  reports  to  the  Board  of  Directors  as  they  may 
request,  and  shall  also  prepare  such  reports  and  statements  as  are  required 
by  the  State  laws.  He  shall  make  out,  twenty  days  before  any  election 
of  Directors,  a  complete  list  of  the  stockholders  entitled  to  vote  at  such 
election,  arranged  in  alphabetical  order,  and  giving  the  number  of  shares 
of  stock  that  may  be  voted  by  each,  and  shall  keep  the  same  open  to  inspec- 
tion at  the  office  of  the  Company  until  the  time  of  and  during  the  said 
election.    He  shall  allow  any  stockholder,  on  application  in  business  hours, 


582 


FORMS   AND   PRECEDENTS 


to  inspect  the  stock  certificate  books,  the  stock  transfer  book,  and  the 
stock  ledger. 

He  shall  attend  to  such  correspondence  and  to  such  other  duties  as 
may  be  incidental  to  his  office  or  properly  be  assigned  him  by  the  Board. 

He  shall  receive  such  salary,  not  exceeding  twelve  hundred  dollars  per 
annum,  as  may  be  fixed  by  the  Board  of  Directors. 

Sec.  5.  The  Treasurer 

The  Treasurer  shall  have  the  custody  of  and  be  responsible  for  all 
moneys  and  securities  of  the  Company;  shall  keep  full  and  accurate 
records  and  accounts  in  books  belonging  to  the  Company,  showing  the 
transactions  of  the  Company,  its  accounts,  liabilities,  and  financial  condi- 
tion; and  shall  see  that  all  expenditures  are  duly  authorized  and  are  evi- 
denced by  proper  receipts  and  vouchers.  He  shall  deposit,  in  the  name  of 
the  Company,  in  such  depository  or  depositories  as  are  approved  by  the 
Directors,  all  moneys  that  may  come  into  his  hands  for  the  Company 
account.  His  books  and  accounts  shall  be  open  at  all  times  during  busi- 
ness hours  to  the  inspection  of  any  Director  of  the  Company. 

The  Treasurer  shall  also  indorse  for  collection  or  deposit  all  bills, 
notes,  checks,  and  other  negotiable  instruments  of  the  Company;  shall  pay 
out  money  as  may  be  necessary  in  the  transactions  of  the  Company,  either 
by  special  or  general  direction  of  the  Board  of  Directors,  and  on  checks 
signed  by  the  President  and  himself,  and  shall  generally,  together  with 
the  President,  have  supervision  of  the  finances  of  the  Company. 

He  shall  also  make  a  full  report  of  the  financial  condition  of  the 
Company  for  the  annual  meeting  of  the  stockholders,  and  shall  make  such 
other  reports  and  statements  as  may  be  required  of  him  by  the  Board  of 
Directors  or  by  the  laws  of  the  State. 

He  shall  give  bond  in  the  sum  of  five  thousand  dollars,  with  sureties 
satisfactory  to  the  Board  of  Directors,  for  the  faithful  performance  of  his 
duties  and  for  the  restoration  to  the  Company,  in  event  of  his  death, 
resignation,  or  removal  from  office,  of  all  books,  papers,  vouchers,  money, 
and  other  property  belonging  to  the  Company  that  may  have  come  into  his 
custody.  He  shall  receive  such  compensation,  not  exceeding  eighteen 
hundred  dollars  per  annum,  as  may  be  fixed  by  the  Board  of  Directors. 

Sec.  6.  The  General  Manager 

The  General  Manager  shall,  under  the  supervision  of  the  Board  of 
Directors  and  the  President,  have  charge  of  and  manage  the  active  busi- 
ness operations  of  the  Company.  He  shall  perform  such  further  duties 
and  make  such  reports  as  may  be  required  of  him  by  the  Board  of  Di- 
rectors, and  shall  receive  such  salary,  not  exceeding  twenty-four  hundred 
dollars  per  annum,  as  may  be  fixed  by  the  Board. 

Article  V — Dividends  and  Finances 

Sec.  I.  Dividends 

Dividends  shall  be  declared  at  such  times  as  the  Board  may  direct,  but 
no  dividend  shall  be  declared  or  paid  save  from  surplus  profits  remaining 
after  all  current  liabilities  of  the  Company  have  been  fully  paid,  nor  shall 
any  dividend  be  declared  that  would  impair  the  capital  of  the  Company. 

Sec.  2.  Reserve  Fund 

No  dividend  to  exceed  six  per  cent  per  annum  shall  be  declared  by 
the  Board  of  Directors  until  there  shall  have  been  accumulated  from 


BY-LAW   FORMS 


583 


surplus  profits  a  reserve  fund  of  ten  thousand  dollars,  such  fund  to  be 
used  for  the  extension  or  enlargement  of  the  business  of  the  Company 
and  the  betterment  of  its  plant,  or  for  such  other  purposes  as  may  be 
necessary  or  advisable. 

Sec.  3.  Debt 

No  debt  shall  be  contracted,  nor  liability  incurred,  nor  contract  made 
by  or  on  behalf  of  this  Company  in  excess  of  one  thousand  dollars  unless 
the  same  be  authorized  or  directed  by  the  by-laws  or  by  a  duly  recorded 
two-thirds  vote  of  the  entire  Board  of  Directors  at  a  regular  meeting,  or 
at  a  special  meeting  called  for  the  purpose. 

Sec.  4.  Bank  Deposits 

The  Treasurer  shall  deposit  the  moneys  of  the  Company,  as  the  same 
may  come  into  his  hands,  in  such  depository  or  depositories  as  may  be 
designated  by  the  Board  of  Directors,  and  such  deposits  shall  be  made 
in  the  name  of  the  Company,  and  moneys  shall  be  withdrawn  therefrom 
only  by  check  signed  by  the  Treasurer  and  countersigned  by  the  President. 

Article  VI — Sundry  Provisions 

Sec.  I.  Corporate  Seal 

The  corporate  seal  of  the  Company  shall  consist  of  two  concentric 
circles,  between  which  shall  be  the  name  of  the  Company,  and  in  the 
centre  shall  be  inscribed  "Incorporated  1917,  New  Jersey,"  and  such  seal, 
as  impressed  on  the  margin  hereof,  is  hereby  adopted  as  the  corporate 
seal  of  the  Company. 

Sec.  2.  Penalties 

Any  officer,  director,  or  stockholder  who  shall  disobey  or  violate  any 
of  the  provisions  of  these  by-laws  shall  be  fined  in  an  amount  not  to 
exceed  twenty  dollars,  such  fine  to  be  imposed  by  the  Board  of  Directors, 
and  if  not  paid  at  the  time,  to  be  deducted  from  any  salary  or  dividend 
then  due  or  that  may  thereafter  become  due  said  person. 

Sec.  3.  Amendment 

These  by-laws  may  be  amended,  repealed,  or  altered,  in  whole  or  in 
part,  at  any  regular  meeting  of  the  stockholders,  or  at  any  special  meeting 
where  such  action  has  been  duly  announced  in  the  call,  provided  that  a 
majority  of  the  entire  voting  stock  of  the  Company  shall  vote  for  such 
amendment,  repeal,  or  alteration. 

The  Board  of  Directors  shall  have  no  power  to  amend,  alter,  or  repeal 
the  by-laws,  but  may  pass  such  additional  by-laws  in  conformity  there- 
with as  may  be  necessary  or  convenient  to  facilitate  the  business  of  the 
Company. 


CHAPTER    LXIV 

FORMS   OF   SUBSCRIPTION   LISTS 

The  general  subject  of  subscription  lists  and  contracts  is 
treated  very  fully  in  Chapter  III  of  the  present  volume.  No 
general  discussion  is  therefore  attempted  here. 

Form  8.     Subscription  List — Simple  Form 

Subscription  List 
THE  INTERLOCKING  SWITCH  COMPANY 


To  be  Incorporated  under  the  Laws  of  New  York 
By  John  H.  Mills,  Harvey  Chandler,  and  Thomas  Wilson 


Capital  Stock $100,000 

Shares $100  each 


We,  the  undersigned,  hereby  severally  subscribe  for  and  agree  to  take 
at  their  par  value  the  number  of  shares  of  the  capital  stock  of  the  Inter- 
locking Switch  Company  set  opposite  our  respective  signatures,  said  sub- 
scriptions to  become  due  so  soon  as  said  Company  is  organized  and  to 
be  then  payable  in  cash  on  demand  of  the  Treasurer  of  the  Company. 

New  York  City,  N.  Y. 
March  14,  191 7. 

names                               addresses  shares  amounts 

Harry  H.  Collins  235  West  23rd  St.,  N.  Y.            10  $1,000 

David  B.  White  975  Willis  Ave.,  N.  Y.                    8  800 

Willard  H.  Ellison  Brooklyn,  N.  Y.                              8  800 


The  names  of  the  incorporators  are  brought  into  the  fore- 
going subscription  list  and  into  the  list  that  follows  as  a  means 
of  identifying  more  clearly  the  proposed  corporation. 

584 


FORMS   OF   SUBSCRIPTION   LISTS  585 

When  subscriptions  are  solicited  widely  or  from  parties  at 
a  distance,  an  individual  subscription  blank  is  usually  em- 
ployed and  is  mailed  with  such  statements  and  prospectuses 
as  may  be  necessary.    The  following  is  a  common  form. 

Form  9.     Subscription  Blank — Individual 

THE  ALL-RUBBER  TIRE  COMPANY 

175  Montgomery  St. 

Jersey  City,  N.  J. 


To  be  Incorporated  under  the  Laws  of  New  Jersey 

for  the  Manufacture  of  Automobile  Tires 
By  Frank  Alston,  John  Stone,  and  Howard  Cole 


Capital   Stock $500,000 

Shares $10  each 

I  hereby  subscribe  for shares  of  the  capital  stock  of  the 

All-Rubber  Tire  Company  at  the  par  value  thereof,  and  agree  to  pay 
twenty-five  per  cent  of  such  subscription  on  demand  of  the  Treasurer 
as  soon  as  said  Company  is  incorporated,  and  twenty-five  per  cent  on 
demand  of  the  Treasurer  of  the  Company  at  any  time  after  ninety  days 
from  the  incorporation  of  said  Company;  the  remainder  of  said  subscrip- 
tion to  be  paid  at  such  times  and  in  such  amounts,  not  exceeding  ten  per 
cent  of  said  subscription  in  any  one  month,  as  may  be  required  by  the 
Board  of  Directors  of  said  Company. 

Dated  at 

The  right  is  reserved  to  reject  or  prorate  any  or  all  subscriptions. 


The  reservation  of  the  right  to  reject  or  prorate  sub- 
scriptions enables  the  parties  in  control  to  exclude  undesirable 
subscribers  and  also  to  scale  or  reject  applications  in  case  of 
over-subscriptions. 

Stockholders  of  financial  institutions  in  New  York  are 
liable  for  debts  of  the  company  to  an  amount  equal  to  the  par 
value  of  the  stock  of  the  institution  owned  by  them.  This 
.double  liability  is  usually  provided  for  at  the  time  of  organiza- 


586  FORMS   AND   PRECEDENTS 

tion  by  placing  the  price  of  the  stock  at  200,  as  in  the  fol- 
lowing application.  This,  when  paid,  creates  a  surplus  equal 
in  amount  to  the  capital  stock  of  the  institution  and,  the  stock- 
holders having  already  paid  in  twice  the  par  value  of  their 
stock,  are  relieved  of  any  further  liability  thereon. 

Form  10.     Subscription  to  Bank  Stock — Individual 


Subscription  for  Stock 

THE  SECURITY  NATIONAL  BANK 

No.  57  Broadway,  New  York 

Capital,  $1,000,000  Surplus,  $1,000,000 

New  York,   1917 

The  undersigned  applies  for shares  of  the  Capital  Stock 

of  The  Security  National  Bank  of  New  York,  at  Two  Hundred  Dollars 
($200)  per  share  and  agrees  to  accept  such  portion  as  may  be  allotted 
and  pay  for  same  when  called. 

Place No.  of  Shares 

Date Name 

Address 


The  foregoing  application  was  sent  out  accompanied  by  a 
list  of  the  proposed  directors  of  the  company  and  by  the  fol- 
lowing letter. 


Form  II.     Letter  Accompanying  Blank 


THE  SECURITY  NATIONAL  BANK 

OF  New  York 

No.  57  Broadway 

Capital,  $1,000,000  Surplus,  $1,000,000 

New  York,  October  26,  191 7. 
Mr.  John  Edwards, 

New  York,  N.  Y. 
Dear  Sir: — 

It  is  proposed  to  organize  a  National  Bank  with  One  Million  Dollars 
($1,000,000)  Capital,  divided  into  Ten  Thousand  (10,000)  Shares  at  One 
Hundred  Dollars    ($100)   per  Share,  and  a  Surplus  of  a  like  amount 


FORMS  OF  SUBSCRIPTION  LISTS 


587 


Offices  of  the  Bank  will  be  located  at  No.  57  Broadway,  New  York  City. 
Upwards  of  One  Million,  Five  Hundred  Thousand  Dollars  ($1,500,000) 
have  already  been  subscribed  towards  the  proposed  Organization  and  the 
gentlemen  named  on  the  opposite  page  will  act  as  Directors. 

A  form  of  Subscription  is  herewith  enclosed  and  you  are  invited  to 
become  a  Subscriber  to  the  Capital  Stock. 

Subscribers  are  requested  to  forward  their  subscriptions  to  the  under- 
signed at  the  above  address. 

Truly  yours, 

Willis  S.  Parker, 
Chairman  of  Organisation  Committee. 
N.  B. — Subscription  books  will  close  on  November  eleventh. 


Subscriptions  made  under  the  foregoing  list  or  applica- 
tion are  of  the  nature  of  a  continuing  proposition,  and,  until 
the  company  is  organized  and  has  actually  accepted  them,  are 
revocable  at  the  will  of  the  subscribers.  (See  §  26.)  To 
avoid  this  element  of  uncertainty,  subscription  lists  are  some- 
times drawn  as  in  the  following  form,  with  a  trustee  acting 
for  the  corporation. 

Form  12.     Subscription  List — Trustee's 

Subscription  List 

WINONA  CEMENT  COMPANY 

215  Broad  St.,  Newark,  N.  J. 


To  be  Incorporated  under  the  Laws  of  the  State  of  New  Jersey  for  the 
Manufacture  of  Portland  Cement 


Capital  Stock $1,000,000 

Shares. $100  each 


We,  the  undersigned,  hereby  agree  with  James  J.  McLaren  as  Trustee 
for  the  Winona  Cement  Company,  to  subscribe,  and  do  hereby  severally 
subscribe,  for  the  number  of  shares  of  the  capital  stock  of  said  Company 
set  opposite  our  respective  signatures,  and  agree  to  pay  the  par  value 
thereof  as  follows : 

Ten  per  cent  on  demand  to  James  J.  McLaren  as  Trustee  for  said 
Company,  such  payment,  or  so  much  thereof  as  may  be  necessary,  to  be 


S8S 


PORi»fS   AND   PRECEDENtS 


ADDRESSES 

SHARES 

AMOUNTS 

Paterson,  N.  J. 
25  Wall  St.,  N.  Y. 
Brooklyn,  N.  Y. 

50 
75 
50 

$5,000 
7,500 
5,000 

used  for  the  preliminary  and  incorporating  expenses  of  said  Company; 
thirty  per  cent  to  the  Treasurer  of  the  Company  so  soon  as  said  corpora- 
tion is  organized ;  twenty-five  per  cent  on  demand  of  the  Treasurer  of 
the  Company  at  any  time  after  ninety  days  from  the  date  of  incorporation, 
and  the  remainder  at  such  times  and  in  such  instalments  as  may  be  pre- 
scribed by  the  Board  of  Directors. 
Newark,  New  Jersey, 

November,  15,  191 7. 

NAMES 

Mr.  Alfred  H.  Braum 
James  H.  Allen 
William  Raymond 


Subcriptions  under  this  form  are  held  to  be  a  contract 
between  the  subscribers  and  the  trustee.  They  cannot  there- 
fore be  withdrawn  nor  revoked  but  are  binding  from  the  date 
when  made.  The  subscription  list  which  follows  is  of  a  simi- 
lar nature. 

Form  13.     Subscription  List — Agreement  with  Promoters 

Subscription  List 
HARRISON  COTTON  MILLS 


Capital  Stock $500,000 

Shares. $100  each 


We,  the  undersigned,  hereby  agree  with  William  H.  Hamilton  and 
John  B.  Rawley,  both  of  New  York  City,  New  York,  as  Promoters  and 
Trustees  of  the  Harrison  Cotton  Mills,  a  corporation  to  be  organized  under 
the  laws  of  the  State  of  North  Carolina  for  the  purposes  and  under  the 
conditions  set  forth  in  the  attached  statement,  to  subscribe,  and  do  hereby 
severally  subscribe  for  the  number  of  shares  of  the  Treasury  Stock  of 
said  Company  set  opposite  our  respective  signatures  at  the  rate  of  Seventy- 
five  Dollars  ($75)  for  each  One  Hundred  Dollar  share,  and  agree  to  pay 
the  amounts  of  our  respective  subscriptions  to  the  Treasurer  of  the  Har- 
rison Cotton  Mills  as  soon  as  the  said  Company  is  incorporated  and  its 
Treasury  Stock  ready  for  issue ;  said  stock  to  be  delivered  to  the  respective 
subscribers  therefor  full-paid  and  non-assessable  upon  payment  of  the 
said  subscription  price. 

It  is  mutually  agreed  between  the  subscribers  hereto  and  the  said 
William  H.  Hamilton  and  John  B.  Rawley,  Promoters  and  Trustees  of 
said  proposed  corporation,  that  the  subscriptions  of  this  present  contract 


FORMS   OF   SUBSCRIPTION   LISTS 


589 


are  conditioned  upon  bona  fide  subscriptions  for  stock  to  the  par  value 
of   Three   Hundred   Thousand   Dollars   being  secured   hereunder   within 
ninety  days  from  the  date  hereof,  and  otherwise  are  null  and  void. 
New  York  City,  New  York, 
December  18,  191 7. 

NAMES  ADDRESSES  SHARES       AMOUNTS 

Samuel  H.  French  Raleigh,  N.  C.  50  $3,750 

Charles  H.  Wellbourne  Raleigh,  N.  C.  50  3,750 

H.  G.  Williamson  New  York  City,  N.  Y.  100  7,500 


Such  a  subscription  list  is  usually  circulated  with  a  state- 
ment attached  giving  full  details  as  to  the  capitalization  and 
purposes  of  the  company.  When  signed  it  forms  an  irrevo- 
cable contract  between  the  subscribers  and  the  trustees. 

This  subscription  contract  requires  the  delivery  of  full- 
paid  treasury  stock,  notwithstanding  the  fact  that  the  subscrip- 
tion price  amounts  to  but  75  per  cent  of  its  face  value.  This 
is  usually  accomplished  by  the  issuance  of  the  stock  for 
property  and  the  return  of  a  portion  of  this  issued  stock  to  the 
company  to  be  sold  for  operating  capital.  Full-paid  treasury 
stock  is  thus  secured  which  can  then  be  delivered  in  accord- 
ance with  the  requirements  of  the  contract.     (See  §  81.) 


CHAPTER    LXV 

RECEIPTS  FOR  STOCK  SUBSCRIPTIONS 

After  incorporation,  payments  of  stock  subscriptions  are 
made  to  the  treasurer  of  the  company  and  receipts  are  issued 
by  him.  If  payments  are  to  be  made  before  incorporation,  a 
trustee  or  trustees  must  necessarily  be  appointed  to  act  for  the 
company.  Such  trustees  are  usually  selected  by  those  having 
charge  of  the  subscription  and  are  named  in  and  made  parties 
to  the  subscription  list. 

Form  14.     Trustee's  Receipt 

No.  I  15  Shares 

LANSFORD  MANUFACTURING  CORPORATION 

Trustee's  Certificate 
$150.00 

I  hereby  certify  that  Henry  M.  McGill,  a  subscriber  for  Fifteen 
Shares  of  the  Capital  Stock  of  the  Lansford  Manufacturing  Corporation 
at  its  par  value  of  One  Hundred  Dollars  per  share,  has  paid  to  me  as 
Trustee  for  said  Corporation,  on  account  of  said  subscription  and  in 
accordance  with  its  terms,  the  sum  of  One  Hundred  and  Fifty  Dollars. 

This  receipt  will,  upon  the  organization  of  the  said  Lansford  Manu- 
facturing Corporation,  be  received  and  credited  by  the  Treasurer  thereof 
to  its  full  amount  as  a  payment  upon  said  subscription. 

New  York,  Gerald  H.  McNell, 

November  15,   1917  Trustee 

This  receipt  is  usually  printed  and  bound  in  book  form 
with  stub  attached,  perforations  separating  the  two  so  that 
the  receipt  may  be  easily  torn  out  and  given  to  the  party  mak- 
ing the  payment.  The  stub  is  the  trustee's  record  of  the  trans- 
action. It  should  show  the  number  of  the  receipt,  the  amount 
paid  in,  the  name  of  the  payee,  the  number  of  shares  sub- 


RECEIPTS   FOR   STOCK   SUBSCRIPTIONS  591 

scribed  for,  the  percentage  or  other  details  of  the  instalment, 
and  the  date. 

When  instalments  are  paid  after  incorporation,  a  simple 
form  of  treasurer's  receipt  may  be  given  for  each  payment. 

Form  15.     Treasurer's  Receipt  for  Instalment 


;     No.  5                                            $150                                         5  Shares 

£ 

THE  WILCOX  RADIATOR  COMPANY 

u 

30  Broad   Street 

Pi 

New  York 

Received  of  Edward  H.  Williamson  the  sum  of  One  Hun- 
dred Dollars,  instalment  payment  No.  5,  of  Ten  Per  Cent  upon 
his   subscription   for  Five   Shares  of  the  Capital   Stock  of  The 
Wilcox  Radiator  Company. 

New  York  City,                                      J.  H.  Wilcox, 

October  14,  1917.                                                        Treasurer 

This  receipt  should  also  have  its  stub  upon  which  the  im- 
portant items  are  entered. 

When  payment  is  made  in  full  of  a  stock  subscription,  and 
the  stock  certificates  are  ready  for  delivery,  they  are  in  them- 
selves a  sufficient  receipt.  If  not  ready  for  delivery,  temporary 
certificates  are  frequently  issued  and  are  exchanged  for  the 
permanent  certificates  of  the  company  as  soon  as  the  latter  are 
ready  for  delivery.  These  temporary  certificates  are  in  the 
form  of  the  regular  stock  certificate,  but  are  usually  hastily 
prepared  at  no  greater  expense  than  is  justified  by  their  tem- 
porary nature.  In  some  cases,  however,  the  temporary  cer- 
tificate is  a  handsomely  engraved  instrument  fully  equal  in  ap- 
pearance to  the  usual  permanent  certificate. 

When  permanent  stock  certificates  are  not  ready  for  deliv- 
ery at  the  time  payments  are  made,  and  temporary  certificates 
are  not  issued,  the  treasurer's  receipt  must  bridge  over  the  in- 
terim.   This  is  usually  more  formal  than  the  ordinary  receipt. 


592  FORMS   AND   PRECEDENTS 

At  times  when  payment  of  stock  subscriptions  has  been 
made  and  neither  permanent  nor  temporary  certificates  are 
ready  for  deHvery,  the  president  will  join  with  the  treasurer 
in  the  signature  of  the  treasurer's  receipt  shown  in  Form  i6, 
which  then  becomes  in  effect  a  stock  scrip.  The  usual  form  of 
stock  scrip  is,  however,  as  shown  in  Form  17.  This  scrip 
might  or  might  not  be  sealed.  Ordinarily  the  corporate  seal 
is  affixed  and  the  stock  scrip  then  becomes  practically  a  tem- 
porary certificate. 

Stock  scrip  is  sometimes  employed  when  subscription 
payments  are  made  in  instalments.  The  face  of  the  scrip  evi- 
dences the  first  instalment,  and  subsequent  instalments  are 
either  indorsed  on  the  back  of  the  scrip  or,  if  personal  pay- 
ment is  impossible,  are  evidenced  by  separate  receipts. 

Where  the  conditions  are  such  as  to  make  payment  in  per- 
son of  the  further  instalments  possible  or  desirable,  the  stock 
scrip  is  ruled  on  the  back  to  permit  of  the  indorsement  of  these 
payments  as  they  are  made,  the  treasurer's  signature  verifying 
each  payment. 

The  treasurer's  receipt  which  follows  is  usually  intended 
for  very  temporary  use  and  is  then  severely  plain  in  style. 

Form  16.     Treasurer's  Receipt  for  Stock  Subscription 


No.  50  $1,000  10  Shares 

HOWARD  PUBLISHING  COMPANY 

No.  225  Atlantic  Avenue, 

Brooklyn,  N.  Y. 


Pi 


This  is  to  certify  that  Harry  H.  Wilson  has  paid  into  the 
Treasury  of  the  Howard  Publishing  Company  the  sum  of  One 
Thousand  Dollars,  payment  in  full  of  his  subscription  for  Ten 
Shares  of  its  Capital  Stock,  duly  executed  Certificates  for  which 
will,  upon  surrender  of  this  Receipt,  be  issued  to  his  order  so  soon 
as  said  Certificates  are  ready  for  delivery. 

August  14,  1917  Frank  J.  Ardwald, 

Treasurer 


RECEIPTS   F*Ok  STOCK   SUBSCRIPTION^ 


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Form  1 8.     Indorsement  Form  for  Stock  Scrip 


Date 

Number   of 
Instalment 

Amount 
Paid 

Signature  of  Treasurer 

Aoril    2.    iQiTi. 

3 

$500.00 
150.00 

William  H.  Hansford 

May  a,    1917 

William  H.  Hansford 

When  this  plan  is  followed,  the  stub  should  also  have  rul- 
ings to  permit  the  entry  of  payments  and  their  date,  so  that 
both  the  scrip  and  its  stub  will  show  a  complete  record  of  the 
transaction. 

A  subscription  to  stock  and  payments  thereon  are  assign- 
able. A  general  form  of  assignment  to  be  indorsed  upon  the 
back  of  a  receipt  for  subscription  payments,  is  as  follows: 

Form  19.    Assignment  of  Subscription  and  Payments 


For  Value  Received,  I  hereby  sell,  assign  and  transfer  unto  John  H. 
Wardwell  of  New  York  City  my  subscription  to  Fifteen  Shares  of  the 
Capital  Stock  of  the  Lansford  Manufacturing  Corporation,  together  with 
the  payments  made  thereon,  all  as  evidenced  by  the  within  certificate, 
and  I  do  hereby  authorize  and  instruct  the  proper  officials  of  said  Com- 
pany upon  completion  of  the  conditions  of  my  said  subscription,  to  issue 
said  stock  to  the  order  of  my  said  assignee. 

New  York,  Henry  H.  McGill 

December  4,  1917. 
In  the  presence  of 

Samuel  H.  Kennarb 


CHAPTER   LXVI 

STOCK    CERTIFICATES    AND    STOCK   BOOKS 
Stock  Certificates 

The  regular  forms  for  stock  certificates  are  usually  pre- 
pared in  quantity.  The  body  and  general  design  of  the  cer- 
tificate are  lithographed,  blanks  being  left  for  the  variable  data 
such  as  the  name  of  corporation,  capital  stock,  etc.,  etc.  These 
are  filled  in  by  local  printers  at  the  time  the  certificates  are  to 
be  used.  For  this  reason  any  variation  of  the  ordinary  form 
involves  the  preparation  of  a  special  certificate  at  a  consider- 
ably increased  cost.  As  the  wording  of  the  regular  forms  is 
fairly  good,  the  cost  of  a  special  certificate  merely  to  secure 
better  wording  is  but  seldom  justified. 

The  certificates  which  follow  are  correct  as  to  wording. 
Two  forms  of  stub  are  given.  The  one  presented  in  connec- 
tion with  Form  21,  "Preferred  Stock,"  is  the  clearer  and  bet- 
ter, but  the  stub  given  in  connection  with  Form  20,  "Common 
Stock,"  is  so  frequently  supplied  with  the  regular  stock  certifi- 
cates that  it  is  also  presented. 

From  the  legal  standpoint  the  style  of  a  stock  certificate 
does  not  bear  in  any  way  upon  its  effectiveness.  From  the 
business  standpoint,  however,  the  certificate  should  at  least 
be  neat  and  attractive.  Whether  the  highly-colored  and  em- 
bellished stock  certificates  so  frequently  seen  are  desirable,  will 
•depend  upon  the  conditions. 

When  the  item  of  cost  is  not  important  or  when  the  stock 
exchange  requirements  are  to  be  complied  with,  the  finest  bond 
paper  is  employed  for  stock  certificates  and  the  design  and 
wording  is  engraved  on  steel.     The  cost  then  runs  up  into 

595 


596 


FORMS   AND   PRECEDENTS 


the  hundreds  of  dollars  according  to  the  style  and  number  of 
certificates.  On  the  other  hand,  if  the  issue  is  but  temporary 
or  the  incorporators  indifferent,  the  certificates  are  frequently 
printed  or  even  written  on  ordinary  paper  and  in  plainest  de- 
sign. Usually,  however,  a  good  quality  of  bond  paper  is  em- 
ployed with  the  body  and  design  lithographed  and  the  variable 
data  printed  in,  the  cost  ranging  from  $3  to  $5  per  hundred 
for  the  cheaper  forms,  up  to  six  or  eight  times  this  amount 
for  the  better  grades.  A  very  neat,  attractive  certificate  on 
good  bond  paper  with  the  variable  data  printed  and  the  cer- 
tificates numbered  and  bound,  will  cost  from  $5  to  $10  for 
a  book  of  100  certificates. 

The  name  of  the  company  is  usually  printed  in  full  upon 
the  certificates,  though  the  abbreviation  "Co."  may  be  em- 
ployed if  desired.  A  seal  is  not  essential  to  the  validity  of 
the  certificate  unless  so  provided  by  charter,  by-law,  or  some 
other  competent  authority.  In  practice,  however,  it  is  invari- 
ably affixed. 

In  the  absence  of  statutory  regulation,  any  form  of  seal 
desired  by  the  corporate  authorities  may  be  adopted  and  there- 
by become  the  corporate  seal.  The  usual  and  preferable  form 
consists  of  an  outer  and  inner  circle,  between  which  appears 
the  name  of  the  corporation.  Within  appears  the  year  of  in- 
corporation and  the  name  of  the  state  in  which  the  company 
is  incorporated.  Seals  for  corporate  purposes  are  made  in  a 
variety  of  styles,  ranging  in  cost  from  $1.50  up.  A  good,  or- 
dinary seal  should  be  secured  for  from  $2  to  $3. 

When  certificates  for  preferred  stock  are  prepared,  the 
conditions  of  issue  should  be  set  out  in  full  on  the  face  of  the 
certificate,  though,  if  lengthy,  the  certificate  may  merely  em- 
body the  more  important  provisions,  and  reference  be  made 
on  the  certificate  to  the  charter,  the  by-law,  or  the  resolution 
under  which  the  stock  is  issued. 

In  any  such  case  the  wording  of  Form  21  would  be  fol- 


STOCK  CERTIFICATES   AND   STOCK:  BOOKS  597 

lowed  to  the  end  of  the  first  paragraph.  The  next  paragraph 
would  then  read  as  follows : 

'The  preferred  stock  represented  by  this  certificate  is 
authorized  by  the  Certificate  of  Incorporation  of  the*  said 
Company  as  filed  in  the  ofiice  of  the  Secretary  of  State  of 
New  York  on  the  first  day  of  March,  191 7,  and  is  issued 
under  the  terms  and  conditions  therein  set  forth." 

In  some  few  states  the  statutes  prescribe  that  the  condi- 
tions of  preferred  stock  must  appear  with  greater  or  less  ful- 
ness on  the  face  of  the  certificate. 

Preferred  stock  is  sometimes  issued  In  very  crude  form, 
"Preferred  Stock"  being  printed  across  the  face  of  the  or- 
dinary certificate  in  red  or  some  other  distinctive  style,  fol- 
lowed by  the  conditions  under  which  the  preferred  stock  is 
issued. 

Preferred  stock  certificates  are  numbered  independently  of 
the  common  stock  certificates.  That  is,  the  first  certificate  of 
preferred  stock  is  numbered  "i"  regardless  of  the  fact  that 
the  first  certificate  of  common  stock  is  also  numbered  "i" 
the  two  series  being  sufficiently  distinguished  by  the  fact  that 
they  are  respectively  common  and  preferred  stock. 

Sometimes  stock  is  held  by  trustees  under  the  terms  of  a 
voting  trust  agreement.  (See  Form  27.)  When  the  trust 
is  formed  the  certificates  of  stock  to  be  held  under  it  are 
duly  assigned  and  are  turned  in  to  the  trustees,  who  surrender 
them  for  cancellation  and  take  out  certificates  in  their  own 
names  as  voting  trustees. 

Voting  trustees'  certificates  are  then  usually  prepared  in 
the  general  style  of  the  ordinary  stock  certificate  and  are  de- 
livered to  the  parties  to  whom  the  stock  belongs  to  evidence 
its  real  ownership.  These  trustees'  certificates  pass  by  assign- 
ment, the  equitable  ownership  of  the  stock  being  thereby  vest- 
ed in  the  assignee.  Form  28  gives  the  general  wording  of 
a  voting  trustees'  certificate. 


598 


FORMS   AND   PRECEDENTS 


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Stock  is  transferred  by  a  similar  assignment,  the  form 
being  placed  upon  the  back  of  the  certificate.  There  is  but 
one  form  of  this  assignment  in  common  use,  which,  though 
rather  informal  and  incomplete  in  some  respects,  is  almost 
invariably  employed.  When  this  assignment  is  duly  executed 
by  the  owner  of  record,  and  the  certificate  is  duly  delivered, 
the  stock  represented  thereby  becomes  the  property  of  the 
party  named  in  the  assignment  form.  If  this  party  wishes  to 
assign  the  certificate  again,  he  might  execute  another  similar 
assignment,  either  written  on  the  back  of  the  certificate,  or 
prepared  as  a  separate  document  and  attached  to  the  certificate, 
but,  as  is  usually  done,  would  probably  surrender  the  certifi- 
cate and  take  out  a  new  one  in  his  own  name,  or  in  the  name 
of  the  party  to  whom  he  wishes  the  stock  to  be  transferred. 

Or  the  assignment  might  be  duly  executed,  but  the  blanks 
not  be  filled  in  at  all.  The  certificate  is  then  said  to  be  assigned 
in  blank  and  may  be  passed  from  hand  to  hand  without  fur- 
ther formahty,  the  ownership  of  the  stock  following  the  cer- 
tificate. Any  owner  w^ho  wishes  to  make  himself  a  stock- 
holder of  record,  i.  e.,  appear  upon  the  stock  books  of  the 
company  as  the  owner  of  the  stock,  may  then  fill  out  the  blanks 
in  the  assignment,  turn  the  certificate  in  to  the  secretary  of  the 
company  for  cancellation,  and  receive  a  new  certificate  in  his 
own  name. 

The  following  assignment  is  complete,  the  parts  which 
have  been  filled  in  being  indicated  by  parentheses: 

Form  22.     Assignment  of  Stock  Certificate 

For  Value  Received,  (I)  hereby  sell  and  transfer  unto  (John  J. 
McMillan  of  New  York  City,  Twenty-five)  Shares  of  the  Capital  Stock 
represented  by  the  within  Certificate,  and  do  hereby  irrevocably  constitute 
and  appoint  (Harry  S.  Gunnison)  my  attorney  to  transfer  the  said  stock 
on  the  books  of  the  within  named  Company  with  full  power  of  substitu- 
tion in  the  premises. 

Dated  (March  2,  1917)  (Howakd  S.  Allen) 

In  presence  of 

(Anna  H.  McClelland) 


STOCK   CERTIFICATES   AND    STOCK   BOOKS  6oi 

Usually  the  secretary  of  the  company  is  named  as  the  at- 
torney who  is  to  make  the  transfer  on  the  books  of  the  com- 
pany, though  any  other  suitable  person  might  be  named  in- 
stead. 

Stock  Books 

The  usual  stock  books  are  the  transfer  book  and  the  stock 
ledger,  this  latter  being  also  frequently  referred  to  as  the  stock 
book.     (See  §§  251,  252.) 

Form  23.     Stock  Transfer  Book 

Ledger  Folio  2^  Transfer  No.  556 

ALLIANCE  AUTOMOBILE   COMPANY 


For  value  Received,  I  hereby  sell,  assign  and  transfer  unto  John  H. 
Lansing,  of  Newark,  New  Jersey,  Seventy-six  Shares  of  the  Capital  Stock 
of  the  above-mentioned  Company,  now  standing  in  my  name  on  the  Com- 
pany books  and  represented  by  surrendered  Certificates  Nos.  32,  37,  and  44. 

Witness  my  hand  and  seal  this  28th  day  of  September,  1907. 

George  B.  Goldman  [l.   s.] 

By  George  Gale,  Attorney, 
New  Certificate  No.  224 
Issued  to  John  H.  Lansing 
Ledger  Folio  84 


The  transfer  book  is  practically  a  duplication  of  the  as- 
signment appearing  upon  the  stock  certificates,  and  by  many 
corporations  is  not  kept  at  all,  the  duly  executed  assignment 
on  the  back  of  the  certificate  being  regarded  as  all-sufficient 
authorization  for  the  transfer  of  the  assigned  stock. 

The  transfer  books  supplied  by  stationers  usually  have  a 
stub  attached  to  the  transfer.  As  the  transfer  itself  remains 
in  the  book,  this  stub  is  merely  an  unnecessary  repetition  of 
matter  already  shown  on  the  transfer. 

The  signature  to  the  assignment  of  the  stock  transfer  book 


602  FORMS   AND   PRECEDENTS 

is  sometimes  witnessed.  This  signature  is,  however,  usually 
that  of  the  secretary  or  the  transfer  agent,  or  is  affixed  in 
their  presence,  and,  as  the  assignment  is  at  the  most  but  sup- 
plementary to  the  duly  witnessed  assignment  on  the  back  of 
the  surrendered  certificate,  a  witness  to  its  signature  is  gen- 
erally regarded  as  superfluous. 

In  many  states  of  the  Union  a  stock  book  or  stock  ledger 
— ^the  two  being  practically  synonymous — is  required  by  the 
state  statutes.  Whether  required  by  the  statutes  or  not,  some 
book  of  the  kind  must  necessarily  be  kept  in  order  to  provide 
an  accurate  record  of  the  issued  and  outstanding  stock  of 
the  company.  The  form  of  stock  book  or  stock  ledger  shown 
in  Form  24  will  be  found  convenient  and  will  meet  the  require- 
ments of  the  statutes  of  almost  every  state  of  the  Union. 

The  leaves  of  this  book  are  indexed,  usually  as  a  matter 
of  convenience,  but  in  the  State  of  New  York  to  secure  the 
alphabetical  arrangement  required  by  statute.  The  name  and 
address  of  the  stockholder  with  whom  the  particular  account 
is  kept  appears  at  the  head  of  the  page  as  in  an  ordinary 
ledger.  On  the  right-hand  side  of  the  page  the  party  is 
credited  with  the  stock  he  purchases  or  otherwise  acquires, 
and  on  the  left-hand  side  is  debited  with  any  stock  disposed 
of.  The  difference  between  the  two  sides  shows  at  any  time 
the  amount  of  stock  standing  to  his  credit. 

On  the  debit  or  sale  side  of  the  account,  the  first  column 
gives  the  date  of  the  transaction;  the  second  the  name  of  the 
party  to  whom  the  stock  is  transferred ;  the  third  the  number 
of  the  surrendered  certificate;  the  fourth  the  number  of  the 
certificate  reissued  to  the  transferrer  when  but  a  portion  of  the 
stock  represented  by  the  surrendered  certificate  is  sold,  and  the 
fifth  column  shows  the  number  of  shares  sold. 

On  the  credit  side,  which  shows  stock  acquired  by  the 
party  with  whom  the  account  is  kept,  the  first  column  gives 
the  date  of  purchase;  the  second  the  name  of  the  party  as- 


STOCK   CERTIFICATES   AND    STOCK   BOOKS 


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FORMS   AND   PRECEDENTS 


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STOCK   CERTIFICATES   AND    STOCK   BOOKS 


605 


signing  the  purchased  stock;  the  third  shows  what  amount  has 
been  paid  on  the  stock,  thereby  indicating  whether  it  is  full 
paid  or  otherwise;  the  fourth  column  gives  the  numbers  of 
the  certificates  issued  to  the  party;  and  the  last  column  the 
number  of  shares  acquired. 

Where  a  number  of  certificates  are  issued  or  cancelled  in 
a  skigle  transaction,  the  entry  will  vary  according  to  the  con- 
ditions. If  but  a  few  certificate  numbers  are  involved,  they 
may  usually  be  entered  in  small  figures  on  the  line  in  the 
proper  column.  If  the  numbers  of  certificates  are  too  great  to 
be  so  entered,  two  or  more  lines  may  be  devoted  to  the  trans- 
action, or  the  numbers  may  be  noted  at  the  bottom  of  the 
page,  reference  to  these  numbers  being  inserted  in  the  column 
where  the  numbers  ordinarily  appear.  If,  however,  the  cer- 
tificates cancelled  or  issued  are  in  different  names,  one  line 
must  necessarily  be  given  for  each  certificate. 

In  New  York,  acting  under  authority  of  §  276  of  the 
Stock  Transfer  Tax  Law  (as  amended  by  Laws  19 13,  Ch. 
779),  a  special  form  of  stock  book  has  been  prescribed  by  the 
State  Comptroller.  The  use  of  this  form  by  New  York  cor- 
porations is  obligatory.  Form  25  shows  a  stock  book  for  the 
use  of  brokers;  Form  26  a  stock  book  for  the  use  of  corpora- 
tions and  transfer  agents.  The  only  new  feature  in  these  pre- 
scribed forms  is  the  introduction  of  the  special  columns  for  the 
record  of  the  stamp  tax  paid  on  transfers  in  the  broker's  stock 
book.  In  Massachusetts,  Pennsylvania,  and  Maine  the  Stock 
Transfer  Law  prescribes  similar  forms. 


..**.,-    w"^ 


CHAPTER    LXVII 

VOTING   TRUST    FORMS 
Form  27.     Voting  Trust  Agreement 

Voting  Trust  Agreement 


We,  the  Undersigned,  stockholders  of  the  Glen  Harbor  Improvement 
Company, -a  corporation  duly  organized  under  the  laws  of  the  State  of 
New  York,  and  having  its  principal  office  in  the  City  of  Yonkers,  in  the 
State  of  New  York,  do  hereby,  in  consideration  of  the  premises  and  of 
our  mutual  undertakings  as  herein  set  forth,  severally  agree  to  transfer 
and  deliver  the  shares  of  stock  held  by  each  of  us  in  said  corporation,  to 
Emmett  M.  Brown,  William  Swift,  and  Andrew  McBride,  all  of  the  said 
City  of  Yonkers,  as  Voting  Trustees  hereunder,  and  mutually  agree  with 
them  and  with  each  other  that  said  Trustees  shall  hold  and  vote  the  said 
stock  for  the  period  of  five  years  from  the  date  hereof,  for  the  purposes 
and  under  the  following  terms  and  conditions : 

1.  All  stockholders  of  the  said  Company  may  join  in  the  voting  trust 
hereby  created,  by  signing  this  present  agreement  and  transferring,  in 
whole  or  in  part,  the  shares  of  stock  held  by  them  in  said  Company  to  the 
said  Trustees,  under  the  conditions  and  for  the  purposes  of  this  present 
agreement. 

2.  Each  stockholder  in  said  Company  joining  this  voting  trust  as 
aforeprovided  shall  become  a  party  thereto  from  the  date  on  which  stock 
owned  by  such  stockholder  in  said  Company  shall  be  transferred  and  de- 
livered to  said  Trustees  for  the  purposes  of  this  agreement. 

3.  The  said  Trustees  shall  surrender  to  the  proper  officer  of  the  said 
Glen  Harbor  Improvement  Company,  for  cancellation,  the  certificates  for 
all  shares  of  stock  transferred  to  said  Trustees,  and  shall,  in  place 
thereof,  have  certificates  of  said  Company  issued  to  themselves  as  Trus- 
tees, and  on  the  face  of  each  said  Trustees'  certificate  shall  be  stated  the 
fact  that  such  certificate  has  been  issued  pursuant  to  this  agreement. 

4.  The  said  Trustees  shall  collect  and  receive  all  dividends  and  profits 
accruing  to  said  stock  and  shall  pay  over  the  same  to  the  respective  equi- 
table owners  thereof. 

5.  The  said  Trustees  shall  issue  to  each  stockholder  becoming  a  party 
thereto  one  or  more  transferable  Trustees'  receipts  for  the  number  of 
shares  of  stock  placed  by  each  of  said  stockholders  respectively  in  this 
voting  trust,  and  when  sucli  Trustees'  receipts  are  duly  transferred  to  other 
parties,  said  Trustees  shall  recognize  such  other  parties  as  the  lawful 
assigns  and  successors  of  the  original  parties  hereto,  entitled  to  all  of 
their  rights  in  the  premises. 

6.  The  stock  held  under  this  agreement  shall,  except  as  hereinafter 

606 


VOTING  TRUST   FORMS 


607 


specially  provided,  be  voted  at  any  meeting  of  the  stockholders  of  said 
Company  by  such  of  the  said  Trustees  as  may  be  present  thereat,  and  said 
vote  shall  be  cast  as  in  the  judgment  of  a  majority  of  the  said  Trustees 
present  at  any  such  meetings  may  be  for  the  best  interest  of  the  stock- 
holders subscribing  to  this  agreement. 

7.  In  all  elections  of  Directors  the  said  stock  shall  be  voted  for  the 
re-election  of  the  present  members  of  the  Board  of  Directors  of  said  Com- 
pany, or,  in  the  event  of  death,  disability,  or  refusal  to  serve  of  any  such 
members,  the  said  stock  shall  be  voted  for  such  other  person  or  per- 
sons as,  in  the  judgment  of  said  Trustees,  shall  be  the  most  suitable  for 
such  office. 

8.  This  agreement  shall  terminate  five  years  from  the  date  hereof,  and 
upon  such  termination  the  said  Trustees  shall,  as  the  outstanding  Trus- 
tees' receipts  are  surrendered  to  them,  duly  indorsed,  give  over  to  the  said 
Company  the  certificates  of  stock  held  by  said  Trustees,  in  pursuance  of 
this  agreement,  properly  indorsed,  and  shall  direct  the  officers  of  said 
Company  to  deliver  to  the  respective  owners  of  the  said  surrendered 
Trustees'  receipts  certificates  for  such  numbers  of  shares  of  stock  as  may 
be  necessary  to  satisfy  the  requirements  of  the  said  surrendered  Trustees' 
receipts. 

9.  In  the  event  of  the  death,  disability,  resignation,  or  refusal  to  act  of 
any  of  the  Trustees  herein  named,  the  remaining  Trustees,  or  Trustee, 
shall  have  power  to  suitably  fill  such  vacancy  or  vacancies,  and  the  person 
or  persons  so  appointed  shall  be  empowered  and  authorized  to  act  here- 
under in  all  respects  as  if  originally  named  herein. 

10.  A  duplicate  of  this  agreement  shall  be  filed  in  the  principal  office 
of  the  said  Company  in  Yonkers  and  shall  there  be  kept  for  the  inspec- 
tion of  any  stockholder  of  the  Company,  daily,  during  business  hours. 

In  Testimony  Whereof,  the  parties  to  this  agreement  have 
hereunto  affixed  their  hands  and  seals  in  the  said  City  of 
Yonkers  this  27th  day  of  February,  1917. 

SHARES 

voting  trustees  stockholders  transferred 

James  Halsey  [l.  s.]  50 

Ernest  Jurgens  [l.  s.]  125 

Harold  M.  Gilsey  [l.  s.]  75 

Willis  M.  Ames  [l.  s.]  75 


Emmett  M.  Brown     [l.  s. 
William  Swift  [l.  s. 

Andrew  McBride        [l.  s. 


Form  28.     Voting  Trustees'  Certificate 


Organized  under  the  Laws  of  the  State  of  New  York 
Number  ....  ....   Shares 

ALBANY   PAPER   COMPANY 
Capital  Stock,  $750,000 


Certificate  for  Stock  Deposited 
Under  Voting  Trust  Agreement  of  April  12,  1912 


Henry  M.  Turner,  Frank  D.  McCall,  William  H.  Montgomery,  How- 
ard T.  Bergman,  and  Philip  T.  Atwater,  Trustees,  by  the  National  Trust 


6o8  FORMS   AND   PRECEDENTS 

Company,  their  agent,  having  received  on  deposit  the  entire  capital  stock 
of  the  Albany  Paper  Company,  full-paid  and  non-assessable,  all  being  held 
under  the  above-named  agreements,  to  the  terms  of  which  the  holder  here- 
of assents  by  receiving  this  certificate,  Certify  that  John  N.  Allen  is  en- 
titled, subject  to  the  provisions  of  said  Agreement,  to  Thirty-five  shares 
of  the  stock  deposited  thereunder.  This  Certificate  entitles  the  holder  to 
all  rights,  dividends,  and  privileges  belonging  to  the  actual  stock,  except- 
ing only  the  right  to  vote.  The  Trusteeship  herein  agreed  to  may 
be  terminated  after  three  years  upon  the  terms  set  forth  in  the  above- 
named  agreement  and  is  ended  by  limitation  in  ten  years  from  date  of 
agreement. 

Transferable  only  on  the  books  of  the  undersigned  at  the  office  of  the 
National  Trust  Company,  New  York  City,  by  the  holder  hereof  in  person 
or  by  duly  authorized  attorney,  upon  surrender  of  this  certificate  properly 
indorsed. 


Dated,  August  IS,  191 7. 


Henry  W.  Turner 
Frank  D.  McCall, 
William    H.    Montgomery, 
Howard  F.  Bergman, 
Philip  T.  Atwater, 

Trustees 
By  National  Trust  Company, 
Depositary  and  Agent 
By  Howard  T.  LathAm, 
Secretary 


The  form  of  assignment  on  the  back  of  this  certificate 
would  be  as  follows: 

Form  29.     Assignment  of  Voting  Trustees'  Certificate 


For  Value  Received,  I  hereby  sell,  assign,  and  transfer  to  Charles 
Campbell  the  interest  in  the  stock  of  the  Albany  Paper  Company  repre- 
sented by  the  within  certificate,  and  do  hereby  irrevocably  constitute  and 
appoint  Howard  T.  Latham  my  attorney  to  transfer  the  said  interest  on 
the  books  of  the  within  named  Trustees  with  full  powers  of  substitution 
in  the  premises. 

Dated  November  15,  1917.  John  N.  Allen 


CHAPTER   LXVIII 

FORMS   FOR  FIRST   MEETINGS 

The  general  subject  of  the  first  or  organization  meetings 
of  corporations  is  discussed  at  length  in  Chapters  XXXIII 
and  XXXIV  of  the  present  volume.  The  forms  of  the  present 
chapter  are  supplementary  thereto. 

In  most  states  of  the  Union  the  first  directors  of  a  cor- 
poration are  elected  by  the  stockholders,  and  when  a  .corpora- 
tion is  organized  a  stockholder's  meeting  must  of  necessity 
precede  the  directors'  meeting.  In  some  states,  however,  as 
in  New  York,  Colorado,  and  California,  the  first  directors  are 
appointed  by  the  charter,  and  in  such  states  the  first  meeting 
of  stockholders  loses  much  of  its  importance,  particularly 
when  the  directors  have  power  to  adopt  by-laws.  In  such  case 
it  may  or  may  not  precede  the  first  meeting  of  directors  at 
the  discretion  of  the  incorporators. 

Usually  at  the  first  meeting  of  stockholders,  the  charter 
is  to  be  received,  by-laws  adopted,  directors  to  be  elected, 
other  details  of  organization  to  be  provided  for,  and,  as  almost 
invariably  property  of  some  kind  is  to  be  taken  over  or  pur- 
chased by  the  new  corporation,  the  stockholders  pass  a  resolu- 
tion authorizing  the  directors  to  accept  the  proposition  as 
submitted. 

At  the  first  meeting  of  directors,  which  usually  immedi- 
ately follows  the  first  meeting  of  stockholders,  officers  are  to 
be  elected,  and  various  details  connected  with  the  commence- 
ment of  the  corporate  business  are  to  be  attended  to,  including 
the  taking  over  or  purchase  of  property  to  be  acquired  by  the 
new  corporation. 

609 


6lO  FORMS  AND   PRECEDENTS 

The  procedure  at  the  first  corporate  meetings  varies  ac- 
cording to  the  requirements  of  the  particular  state.  In  the 
great  majority  of  states  the  first  meeting  of  stockholders  must 
be  held  within  the  state.  If  all  or  a  majority  of  the  incor- 
porators reside  outside  the  state  of  incorporation — a  condition 
which  frequently  arises — the  requirement  that  the  first  meet- 
ing of  stockholders  must  be  held  within  the  home  state  is 
complied  with  by  means  of  proxies.  The  non-resident  incor- 
porators send  their  proxies  to  the  attorney  or  other  agent  who 
represents  the  company  within  the  state  in  which  the  corpora- 
tion is  to  be  formed,  who  thereupon  holds  the  first  meeting 
of  stockholders,  transacts  all  necessary  business,  complies  with 
all  the  legal  requirements,  prepares  the  proper  minutes  of  the 
meeting,  has  them  duly  signed  by  the  acting  president  and 
secretary  of  the  meeting,  and  turns  the  minutes  and  the  com- 
pany over  to  its  "incorporators"  legally  qualified  to  conduct 
its  business.  Such  meetings,  though  purely  formal,  are  per- 
fectly legal. 

The  following  minutes  of  first  meetings  are  drawn  in 
compliance  with  the  laws  of  New  Jersey.  They  may  be  easily 
adapted  to  the  requirements  of  any  other  state  by  a  few  slight 
modifications. 

Form  30.     Minutes  of  Stockholders'  Meeting 

THE     IMPERIAL     GAS     STOVE     COMPANY 

OF  NEW  JERSEY 


Minutes  of  First  Meeting  of  Stockholders 
Held  December  S,  191 7 


Pursuant  to  written  call  and  waiver  of  notice  signed  by  all  of  the  in- 
corporators, the  first  meeting  of  stockholders  of  The  Imperial  Gas  Stove 
Company  was  held  in  the  office  of  Harvey  K.  Wilson,  No.  24  Morris 


FIRST   MEETINGS  6ll 

Street,  Newark,  New  Jersey,  at  3  o'clock  in  the  afternoon,  on  the  5th  day 
of  December,  1917. 

Sidney  F.  Horner  called  the  meeting  to  order  and  on  motion,  George 
P.  Goff  was  elected  Chairman,  and  Warren  Calvert  was  appointed  Sec- 
retary of  the  meeting. 

The  Secretary  presented  and  read  the  call  and  waiver  of  notice  pur- 
suant to  which  the  meeting  was  held.  On  motion  it  was  ordered  to  be  en- 
tered in  the  minute  book  following  the  minutes  of  the  meeting.  (See 
Form  31. 

The  proxy  of  Martin  Coleman  appointing  Herbert  J.  Martin  his  repre- 
sentative was  presented,  and  no  objection  being  made  was  ordered  to  be 
entered  in  the  minute  book  following  the  minutes  of  the  meeting. 

There  were  present  in  person : 

NAMES  NO.  OF  SHARES 

George  P.  Goff  i 

W.  S.  Phillips I 

Sidney  F.  Horner I 

Warren    Calvert I 

There  were  present  by  proxy: 

NAMES  NAME  OF  PROXY  NO.  OF  SHARES 

Martin   Coleman  Herbert  J.   Martin  i 

The  chairman  presented  a  certified  copy  of  the  Certificate  of  Incor- 
poration and  stated  that  the  original  had  been  recorded  in  the  office  of 
the  Clerk  of  Essex  County  on  the  3d  day  of  December,  191 7,  and  was 
filed  in  the  office  of  the  Secretary  of  State  at  Trenton,  on  the  4th  day 
of  December,  191 7,  and  that  the  organization  tax  and  statutory  filing  and 
recording  fees  had  been  duly  paid.  On  motion  it  was  ordered  that  the 
said  Certificate  of  Incorporation  be  entered  on  the  first  pages  of  the 
Book  of  Minutes.     (See  Forms  1-4.) 

The  Secretary  presented  a  form  of  By-Laws  prepared  by  Counsel  for 
the  Company,  which  was  read  article  by  article  and  as  a  whole  unani- 
mously adopted  and  was  ordered  to  be  entered  in  the  Book  of  Minutes 
immediately  following  the  Certificate  of  Incorporation.     (See  Forms  6-7.) 

The  Chairman  announced  that  the  next  business  in  order  was  the  elec- 
tion of  five  directors  as  provided  in  the  by-laws  and  thereupon  ap* 
pointed  Messrs.  Thomas  Felton  and  Charles  C.  Kendall  inspectors.  Said 
inspectors  were  duly  sworn  and  proceeded  to  open  the  polls  and  receive 
ballots.  All  the  stockholders  present  in  person  or  by  proxy  having  voted, 
the  inspectors  reported  that  ballots  were  cast  as  follows: 

FOR  DIRECTORS  VOTES 

George  P.  Goff 5 

W.  S.  Phillips 5 

Sidney  F.  Horner 5 

Warren  Calvert 5 

Martin  Coleman 5 

and  that  the  gentlemen  named  were  therefore  duly  elected  directors  of 
the  Company.  It  was  ordered  that  the  oath  and  report  of  the  in- 
spectors be  entered  in  the  Minute  Book  following  the  minutes  of  the 
meeting.     (See  Form  33.) 


6l2  FORMS   AND   PRECEDENTS 

On  motion  duly  made  and  seconded,  the  following  resolution  was 
unanimously  adopted  : 

Resolved,  That  the  principal  office  of  this  Company  in  the  State 
of  New  Jersey  shall  be  at  No.  24  Morris  Street,  Newark,  and  the 
agent  in  charge  upon  whom  process  may  be  served,  shall  be  Harvey 
K  Wilson. 

The  Secretary  presented  a  waiver  of  notice  of  assessment  and  of  the 
time  and  place  of  payment  thereof,  signed  by  all  the  incorporators.  The 
"waiver  was  ordered  to  be  entered  in  the  Minute  Book  following  the  min- 
utes of  the  meeting.     (See  Form  34.) 

The  Secretary  presented  a  proposal  from  Richard  White,  of  South 
Orange,  New  Jersey,  offering  to  assign  to  the  Company  in  exchange  for 
its  entire  common  stock,  the  United  States  letters  patent  granted  to  him 
for  Improvements  in  Gas  Heating  Apparatus,  together  with  his  agree- 
ment to  assign  to  the  Company  any  future  inventions  or  improvements 
made  by  him  in  Gas  Heating  Apparatus. 

Said  proposal  was  ordered  received  and  the  following  resolution  in 
regard  thereto  was  moved,  seconded  and  unanimously  adopted : 

Whereas,  Richard  White,  for  and  in  consideration  of  the 
issue  to  his  order  of  the  entire  common  stock  of  this  Company 
of  the  par  value  of  One  Hundred  Thousand  Dollars  ($100,000), 
has  offered  to  sell  and  assign  to  this  Company  the  United  States 
rights  for  his  Improvements  in  Gas  Heating  Apparatus,  together 
with  his  agreement  to  assign  to  the  Company  all  future  improve- 
ments and  inventions  in  Gas  Heating  Apparatus,  all  as  set  forth 
in  his  written  proposal  submitted  to  this  meeting;  and 

Whereas,  It  appears  to  the  stockholders  of  this  Company  that 
such  property  is  necessary  for  the  business  and  lawful  purposes 
of  the  Company,  and  that  the  same  is  of  the  reasonable  value  of 
One  Hundred  Thousand  Dollars  ($100,000)  : 

Now,  Therefore,  Be  It  Resolved,  That  the  Board  of  Directors 
of  this  Company  be  and  hereby  are  authorized  and  empowered  and 
directed  to  accept  the  said  proposition  and  to  issue  the  said  com- 
mon stock  of  this  Company  in  exchange  for  the  said  letters  patent 
and  agreement  of  the  said  Richard  White. 
There  being  no  further  business,  the  meeting  was  declared  adjourned. 
George  P.  Goff,  Warren  Calvert, 

Chairman  Secretary 


In  pursuance  of  the  motions  of  the  preceding  minutes,  the  following 
forms  are  entered  in  the  minutes : 

1.  Certificate  of  Incorporation 

2.  By-Laws 

3.  Call  and  Waiver  of  Notice 

4.  Proxy  of  Martin  Coleman 

5.  Oath  and  Report  of  Inspectors  of  Election 

6.  Waiver  of  Notice  of  Assessment 

Warren  Calvert, 
Secretary 


FIRST   MEETINGS 


613 


Instruments  received  and  filed  during  the  course  of  a 
meeting  are  frequently  ordered  embodied  in  the  minutes  in- 
stead of  following  them.  There  is  no  legal  objection  to  either 
arrangement.  The  minutes  are,  however,  clearer  and  more 
closely  connected  when  the  instruments  are  appended  instead 
of  being  brought  into  the  body  of  the  minutes. 

Form  31.     Call  and  Waiver  of  Notice — Stockholders' 
THE   IMPERIAL   GAS    STOVE   COMPANY 


Call  and  Waiver  of  Notice 

FOR 

First  Meeting  of  Stockholders 


We,  the  undersigned,  being  all  of  the  incorporators  of  the  above- 
named  corporation  and  all  of  the  subscribers  to  its  capital  stock  entitled 
to  notice  of  said  meeting,  do  hereby  call  the  first  meeting  of  the  stock- 
holders of  said  corporation  to  be  held  in  the  office  of  Harvey  K.  Wilson, 
No.  24  Morris  Street,  Newark,  New  Jersey,  at  3  p.m.,  on  the  5th  day 
of  December,  1917,  for  the  purpose  of  receiving  the  charter,  adopting  by- 
laws, electing  directors,  considering  and  acting  upon  a  proposal  for  the 
issue  of  the  capital  stock  of  the  corporation  in  exchange  for  property,  and 
the  transaction  of  all  such  other  business  as  may  be  necessary  or  con- 
venient in  connection  with  the  organization  of  said  corporation,  and  we 
do  hereby  waive  all  requirements  as  to  notice  or  publication  of  the  time, 
place,  and  purposes  of  this  first  meeting  and  do  consent  to  the  trans- 
action thereat  of  any  and  all  business  pertaining  to  the  affairs  of  the 
Company. 

Dated  Newark,  N.  J.,  December  4,  1917. 

George  P.  Goff 
W.  S.  Phillips 
Sidney  F.  Horner 
Warren  Calvert 
Martin  Coleman 
Harold  Arnold 


This  call  and  waiver  must  be  signed  by  every  person  en- 
titled to  be  present  at  the  meeting,  although  the  presence  of 
any  person  not  signing  the  waiver  would  be  held  in  itself  to 
be  a  waiver  of  notice  and  an  acceptance  of  the  call. 


5i4  FORMS   AND   PRECEDENTS 

Form  32.     Proxy 

THE   IMPERIAL   GAS    STOVE   COMPANY 


Proxy 

FOR 

First  Stockholders'  Meeting 


Know  All  Men  By  These  Presents : 

That  I,  the  undersigned,  one  of  the  incorporators  and  a  subscriber  to 
the  stock  of  the  above-named  corporation,  do  hereby  constitute  and  appoint 
George  P.  Goff,  my  true  and  lawful  attorney,  with  full  powers  of  substi- 
tution and  revocation,  to  represent  me  at  the  first  meeting  of  the  stock- 
holders of  said  corporation  to  be  held  on  the  5th  day  of  December,  1917, 
and  at  any  meeting  postponed  or  adjourned  therefrom,  hereby  granting 
my  said  attorney  full  power  and  authority  to  act  for  me  at  said  meeting, 
and  in  my  name,  place,  and  stead  to  vote  thereat  upon  the  said  stock  of 
said  corporation  subscribed  for  by  me,  or  upon  which  I  may  then  be 
entitled  to  vote,  in  the  election  of  directors  and  in  the  transaction  of  any 
and  all  other  business  pertaining  to  the  affairs  of  the  Company  that  may 
be  brought  before  said  meeting,  all  as  fully  as  I  might  or  could  do  if  per- 
sonally present,  and  I  hereby  ratify  and  confirm  all  that  my  said  attorney, 
or  his  substitute,  shall  lawfully  do  at  such  meeting  in  my  name,  place,  and 
stead. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  signature  and 
seal,  this  4th  day  of  December,  191 7. 

Martin  Coleman        [l.  s.] 
In  presence  of 

Patrick  Sullivan 


In  New  York  the  oath  and  certificate  of  inspectors  of 
election  must  be  filed  in  the  office  of  the  county  clerk.  In 
New  Jersey  this  is  not  required,  nor  need  the  inspectors  be 
sworn. 

In  the  majority  of  the  states  inspectors  of  election  are  not 
required  by  law.  They  are,  however,  usually  appointed  in 
order  to  secure  the  proper  conduct  of  the  election  and  a  formal 
report  of  its  results.  The  following  form  will  serve  in  any 
such  cases,  the  oath  being  omitted  if  it  is  not  deemed  neces- 
sary. 


FIRST   MEETINGS  6l^ 

Form  33.     Inspectors'  Oath  and  Report 

Inspectors'  Oath  and  Report 


State  of  New  Jersey     1       -  c  • 
County  of  Essex  ^        s.. 

We,  the  undersigned,  the  duly  appointed  Inspectors  of  Election  of  the 
Imperial  Gas  Stove  Company,  being  severally  sworn,  upon  our  respective 
oaths,  do  undertake  and  swear  that  we  will  faithfully,  honestly,  and 
impartially  perform  our  duties  as  Inspectors  at  the  election  of  directors  of 
said  Company,  to  be  held  this  5th  day  of  December,  191 7,  and  that  we 
will  make  a  true  report  of  the  results  of  said  election. 


Thomas  Felton 
Charles  C.  Kendall 


Subscribed  and  sworn  to  before  me 
this  5th  day  of  December,  1917. 
Fergus  K.  Willie, 
Notary  Public 


We,  the  undersigned.  Inspectors  of  Election,  duly  appointed  to  con- 
duct the  election  for  directors  of  the  Imperial  Gas  Stove  Company  at 
the  meeting  of  the  stockholders  thereof,  held  this  date  at  the  office  of 
the  Company,  No.  24  Morris  Street,  Newark,  New  Jersey,  do  hereby  cer- 
tify and  report  that  we  being  first  duly  sworn  by  oath  hereunto  annexed, 
did  hold  and  conduct  the  said  election  by  ballot  in  due  form  and  that  the 
votes  cast  thereat  are  as  follows: 

votes 
names  received 

George  P.  Goff S 

W.  S.  Phillips 5 

Sidney  F.  Horner 5 

Warren  Calvert  5 

Martin  Coleman 5 

Thomas  Felton 
Charles  C.  Kendall 
Newark,  New  Jersey, 

December  5,  1917. 


(For  other  forms  of  Inspectors'  Reports  see  Forms  105,  106,  107,  108.) 

The  following  form  is  local.  If  not  adopted,  thirty  days' 
notice  must  be  given  the  incorporators  before  their  subscrip- 
tions can  be  enforced  under  the  laws  of  New  Jersey. 


6t6  forms  and  precedents 

Form  34.     Waiver  of  Notice  of  Assessment 

Waiver  of  Notice  of  Assessment 


We,  the  undersigned,  subscribers  to  the  Capital  Stock  of  the  Imperial 
Gas  Stove  Company  of  New  Jersey,  hereby  waive  notice  of  the  time 
and  place  of  payment  of  our  respective  subscriptions  to  the  Capital  Stock 
with  which  said  Company  begins  business,  and  also  waive  all  other  re- 
quirements of  the  laws  of  New  Jersey  as  to  notice  of  assessment  and 
payment  thereof,  and  we  agree  to  pay  our  respective  subscriptions  to  the 
Treasurer  of  the  Company  in  such  amounts  and  at  such  times  as  the 
Board  of  Directors  may  require. 

Newark,  New  Jersey,  George  P.  Goff 

December  5,  191 7.  W.  S.  Phillips 

Sidney  F.  Horner 
Warren  Calvert 
Martin  Coleman 


'  The  first  meeting  of  directors  usually  follows  immediately 
after  the  first  meeting  of  stockholders,  its  precise  date  or  time 
being  fixed  by  the  call  and  waiver  of  notice  signed  by  the 
newly  elected  directors.  Unless  notice  is  waived  by  all  of  the 
newly  elected  directors,  the  first  meeting  of  directors  is  called 
as  a  special  meeting  in  accordance  with  the  requirements  of 
the  by-laws  of  the  company,  or  otherwise  the  directors  wait 
until  the  time  fixed  by  the  by-laws  for  their  first  regular 
meeting. 


Form  35.     Minutes — Directors' 


IMPERIAL  GAS  STOVE  COMPANY 
OF  New  Jersey 


Minutes  of  First  Meeting  of  Directors 
Held  December  5,  1917 


Pursuant  to  written  call  and  waiver  of  notice  the  Board  of  Directors 
of  the  Imperial  Gas  Stove  Company  held  its  first  meeting  in  the  office 
of  Harvey  K.  Wilson,  No.  24  Morris  Street,  Newark,  New  Jersey,  at 
4  p.  M.,  on  the  5th  day  of  December,  1917. 


FIRST   MEETINGS 


617 


W.  S.  Phillips  called  the  meeting  to  order  and  on  motion,  George  P. 
Goflf  was  elected  Chairman,  and  Warren  Calvert  was  appointed  Secretary 
of  the  meeting. 

There  were  present: 

George  P.  Goff 
W.  S.  Phillips 
Sidney  F.  Horner 
Warren  Calvert 

constituting  a  quorum  of  the  Board.    Absent:  Martin  Coleman. 

The  Secretary  presented  the  call  and  waiver  of  notice  signed  by  all 
the  Directors,  pursuant  to  which  the  meeting  was  held.  It  was  ordered 
spread  upon  the  Minute  Book  immediately  following  the  minutes  of  the 
meeting.     (See  Form  36.) 

The  Chairman  announced  the  first  business  in  order  to  be  the  election 
of  officers  to  serve  for  the  remainder  of  the  corporate  year  and  until 
the  election  of  their  successors,  and  appointed  Messrs.  Harvey  K.  Wilson 
and  Warren  Calvert  tellers  to  conduct  the  election.  The  votes  of  those 
present  were  duly  cast  by  ballot,  resulting  in  the  unanimous  election  of 
the  following  officers : 

President   George  P.  Goff 

Vice-President Martin  Coleman 

Secretary Warren  Calvert 

Treasurer   W.  S.  Phillips 

It  was  ordered  that  the  Secretary  be  sworn  and  subscribe  a  written 
oath  of  office,  and  that  said  oath  be  spread  upon  the  Minute  Book  im- 
mediately following  the  minutes  of  the  present  meeting.  The  Secretary 
thereupon  took  said  oath  and  entered  upon  the  discharge  of  his  duties. 
(See  Form  ^7.) 

It  was  ordered  that  the  Treasurer  give  bond  as  provided  in  the 
by-laws,  in  the  sum  of  Five  Thousand  Dollars  ($5,000),  the  form  and 
sureties  of  same  to  be  approved  by  the  Board  of  Directors.  The  Treas- 
urer thereupon  submitted  a  bond  signed  by  himself  as  principal  and  by 
the  Fidelity  Surety  Company  of  Maryland  as  surety.  The  bond  as  pre- 
sented was  approved  and  ordered  to  be  filed  in  the  custody  of  the  Secre- 
tary of  the  Company. 

Upon  motion  duly  made  and  seconded  the  following  resolutions  were 
unanimously  adopted : 

Resolved,  That  the  officers  of  the  Company  be  authorized  to 
lease  an  office  for  the  use  of  the  Company  at  No.  30  Broad  Street, 
New  York  City,  the  rental  thereof  not  to  exceed  Eighty  Dollars 
($80)  per  month,  and  that  the  meetings  of  the  Board  of  Directors 
be  from  time  to  time  held  there  or  at  the  designated  office  of  the 
Company  in  the  State  of  New  Jersey  as  the  Board  of  Directors  may 
appoint. 

Resolved,  That  the  Treasurer  be  and  hereby  is  authorized  and 
instructed  to  open  an  account  for  the  Company  with  the  Seaboard 
National  Bank  of  New  York  City,  and  to  deposit  therein  all  funds 
of  the  Company  coming  into  his  possession,  such  account  to  be  in 
the  name  of  the  Company  and  funds  deposited  therein  to  be  with- 
drawn only  by  check  signed  by  the  Treasurer  and  countersigned  by 
the  President. 


6i8  FORMS   AND   PRECEDENTS 

Resolved,  That  certificates  for  common  and  preferred  stock  as 
submitted  to  the  Board  and  identified  by  the  signature  of  the  Presi- 
dent, be  and  hereby  are  adopted  as  the  stock  certificates  of  the 
Company,  and  that  the  same  be  attached  to  the  pages  of  the  Minute 
Book  immediately  following  the  minutes  of  the  present  meeting. 

Resolved,  That  the  Secretary  be  instructed  to  procure  Five 
Hundred  (500)  certificates  of  common  stock  and  Five  Hundred 
(500)  certificates  of  preferred  stock  in  form  as  adopted,  also  a 
corporate  seal  as  provided  in  the  by-laws,  and  in  addition  thereto 
such  records,  stock  and  transfer  books,  books  of  account,  and  sta- 
tionery and  office  supplies  as  may  be  necessary  for  the  proper 
conduct  of  the  Company's  operations  and  business. 

Resolved,  That  the  Treasurer  be  hereby  authorized  and  in- 
structed to  pay  from  the  Company  funds  all  expenses  properly 
incurred  in  connection  with  the  incorporation  of  the  Company,  the 
total  of  such  payments  not  to  exceed  Three  Hundred  Dollars  ($300). 

Resolved,  That  an  assessment  of  One  Hundred  Per  Cent 
(100%)  be  levied  upon  the  shares  of  stock  subscribed  for  by  the 
incorporators  as  shown  by  the  certificate  of  incorporation. 

Resolved,  That  the  Secretary  prepare  the  certificate  of  election 
of  directors  and  officers  required  by  the  New  Jersey  statutes,  and 
that  the  proper  officers  of  the  Company  execute  and  file  the  same 
in  the  office  of  the  Secretary  of  State  of  New  Jersey  within  thirty 
days  from  date,  and  that  a  copy  thereof  be  spread  upon  the  Minute 
Book  immediately  following  the  minutes  of  the  present  meeting. 

The  President  then  brought  to  the  attention  of  the  meeting  (i)  the 
written  proposal  of  Mr.  Richard  White  of  South  Orange,  New  Jersey  to 
transfer  and  assign  his  Patents  for  Gas  Heating  Apparatus  to  the  Com- 
pany, together  with  an  agreement  to  assign  all  future  inventions  and 
improvements  in  gas  heating  apparatus  made  by  him,  in  exchange  and 
full  payment  for  the  entire  common  stock  of  the  Company,  and  (2)  the 
resolution  of  the  stockholders  approving  said  proposal  and  instructing  the 
Board  of  Directors  to  accept  the  same. 

Mr.  White's  proposal  was  ordered  received  and  spread  upon  the 
Minute  Book  immediately  following  the  minutes  of  the  present  meeting, 
and  on  motion  duly  made  and  seconded  the  following  resolution  relating 
thereto  was  unanimously  adopted: 

Whereas,  The  property  offered  by  Richard  White  in  exchange 
for  the  entire  common  stock  of  this  Company  is  adjudged  by  this 
Board  to  be  of  the  reasonable  value  of  One  Hundred  Thousand 
Dollars  ($100,000)  and  to  be  necessary  for  the  use  and  lawful  pur- 
poses of  this  Company : 

Now,  Therefore,  Be  It  Resolved,  That  the  said  proposed  as- 
signment of  Letters  Patent  and  the  agreement  for  the  assignment 
of  future  rights  and  patents  in  exchange  for  the  entire  common 
stock  of  this  Company,  as  set  forth  in  the  said  proposition  of 
Richard  White  as  spread  upon  the  Minute  Book  of  this  Company, 
is  hereby  accepted  and  the  proper  officers  of  the  Company  are  hereby 
authorized  and  instructed  to  receive  the  duly  executed  assignments 
and  agreements  of  said  Richard  White  in  form  approved  by  Counsel 
for  the  Company,  and  to  issue  in  exchange  therefor,  the  entire 
common  stock  of  the  Company  consisting  of  One  Thousand  (1,000) 
Shares  of  the  par  value  of  One  Hundred  Dollars  ($100)  per  share, 
to  such  person  or  persons  as  may  be  designated  by  the  written 


FIRST   MEETINGS  •         619 

orders  of  the  said  Richard  White,  and  to  do  all  other  things  neces- 
sary and  convenient  to  consummate  the  said  exchange  and  issue  of 
stock  for  property. 
There  being  no  further  business,  the  meeting  was  adjourned. 

Warren  Calvert, 

Secretary 
George  P.  Goff, 
President 


Tn  pursuance  of  the  motions  of  the  preceding  minutes,  the  following 
forms  are  hereunto  appended : 

1.  Call  and  Waiver  of  Notice 

2.  Secretary's  Oath  of  Office 

3.  Report  to  Secretary  of  State 

4.  Forms  of  Stock  Certificates — Common  and  Preferred 

5.  Written  Proposal  of  Richard  White  to  Exchange  Property  for 

the  Common  Stock  of  the  Company 

Warren  Calvert 

Secretary 


The  forms  required  by  these  minutes  follow  in  part.  The 
treasurer's  bond  is  omitted  as  being  too  lengthy  for  the  avail- 
able space.  Forms  may  be  obtained  from  any  surety  company. 
The  report  to  the  Secretary  of  State  is  also  omitted  as  being 
local  and  unnecessary.  Blanks  for  this  report  may  be  obtained 
by  application  to  the  Secretary  of  State  at  Trenton,  New  Jer- 
sey. Forms  of  stock  certificates  are  given  in  Chapter  LXVI, 
"Stock  Certificates  and  Stock  Books." 

Form  36.     Call  and  Waiver — Directors' 

THE  IMPERIAL  GAS  STOVE  COMPANY 


Call  and  Waiver  of  Notice 

for 
First  Meeting  of  Birectors 


We,  the  undersigned,  being  all  of  the  directors  of  The  Imperial  Gas 
Stove  Company,  do  hereby  call  the  first  meeting  of  the  Directors  of 
said  Company  to  be  held  in  the  office  of  Harvey  K.  Wilson,  No.  24 
Morris  Street,  Newark,  N.  J.,  at  4  p.m.,  on  the  5th  day  of  December, 
1917,  for  the  purpose  of  electing  officers,  acting  upon  a  proposal  to  assign 


620         *  FORMS   AND   PRECEDENTS 

property  to  the  Company  in  exchange  for  stock,  and  for  doing  all  such 
other  things  as  may  be  necessary  or  desirable  in  connection  with  the 
organization  of  the  Company  or  the  promotion  of  its  business,  and  we 
hereby  waive  all  statutory  or  by-law  requirements  as  to  notice  of  time, 
place,  and  objects  of  said  meeting  and  consent  to  the  transaction  thereat 
of  any  and  all  business  pertaining  to  the  affairs  of  the  Company. 
Newark,  New  Jersey, 

December  5th,  191 7.  George  P.  Goff 

W.  S.  Phillips 
Sidney  F.  Horner 
Warren  Calvert 
Martin  Coleman 


Frequently  when  directors'  meetings  are  to  be  assembled 
by  call  and  waiver,  the  signatures  of  all  the  directors  are  not 
secured  at  the  time  but  are  secured  subsequently — and  some- 
times long  after  the  date  of  the  meeting.  It  is  worthy  of  note 
that  it  has  been  held  that  a  director's  signature  to  waiver 
after  the  meeting  ^'looking  to  ratification  of  what  was  done 
is  without  force  to  validate  the  action  taken."^  In  this  case 
the  action  of  the  meeting  held  pursuant  to  a  waiver  signed  by 
some  of  the  directors  after  the  meeting,  was  held  to  be  in- 
valid. 

Form  37.     Secretary's  Oath  of  Office 

Secretary's  Oath 

State  of  New  Jersey     ) 
County  of  Essex  j       ^^" 

Warren  Calvert,  the  Secretary  of  the  Imperial  Gas  Stove  Company, 
being  by  me  duly  sworn,  upon  his  oath,  does  promise  and  swear  that  he 
will  faithfully  and  impartially  discharge  the  duties  of  Secretary  of  said 
Company  to  the  best  of  his  skill  and  ability. 

Warren  Calvert 
Subscribed  and  sworn  to  before  me 
this  5th  day  of  December,  191 7. 
Henry  H.  Frank, 

Commissioner  of  Deeds  for 
the  State  of  New  Jersey 


1  Holcombe  et  ah  v.   Trenton  White  City  Co.,  82  Atl.   (N.  J.)  618  (1912). 


FIRST   AIEETINGS  62 1 

The  New  Jersey  statutes  require  that  the  Secretary  be 
sworn.  Elsewhere  the  formality  would  seem  to  be  unneces- 
sary. 

Form  38.     Proposal  to  Exchange  Property  for     Stock 
Proposal  to  Exchange  Property  for  Stock 


To  the  Imperial  Gas  Stove  Company, 
No.  24  Morris  Street, 
Newark,  N.  J. 

Gentlemen  : — 

I  hereby  offer  in  exchange  and  full  payment  for  the  Common  Stock 
of  your  Company,  amounting  to  One  Thousand  (1,000)  Shares  of  the  par 
value  of  One  Hundred  Dollars  ($100)  per  share,  United  States  Letters 
Patent,  No.  605,948,  issued  to  me  October  7,  191 7,  for  Improvements  in 
Gas  Heating  Apparatus,  said  Patent  to  be  assigned  to  your  Company  to- 
gether with  my  agreement  to  assign  without  further  consideration  all  other 
inventions  and  improvements  in  gas  heating  apparatus  which  I  may  at  any 
time  hereafter  own  or  control. 

The  said  One  Thousand  (1,000)  Shares  of  Stock  is  to  be  issued  to  my 
order,  full-paid  and  non-assessable,  against  the  delivery  to  your  Company 
of  due  assignments  of  said  Letters  Patent  and  of  my  duly  executed  agree- 
ment for  the  assignment  of  any  future  inventions  and  improvements  that 
I  may  make  in  gas  heating  apparatus. 

Yours  truly, 

New  York  City,  Richard  White 

December  5,  191 7. 


This  proposal  provides  for  the  issue  of  the  entire  common 
stock  in  exchange  for  the  property  mentioned.  Usually  the 
incorporators  subscribe  for  at  least  a  portion  of  the  common 
stock  of  the  company.  On  the  face  of  it,  therefore,  the  pro- 
posal calls  for  the  issue  of  stock  already  under  contract  to 
the  incorporators  and  this  must  be  adjusted  in  some  way  be- 
fore the  proposal  is  accepted.  The  matter  may  be  simply 
arranged  in  either  one  of  two  ways:  by  agreement  with  the 
party  making  the  proposal,  that  his  payment — as  far  as  the 
incorporators'  subscriptions  are  concerned — may  be  regarded 


622  FORMS   AND   PRECEDENTS 

as  paid  on  their  account,  the  stock  being  issued  to  them;  or 
the  incorporators  may  assign  their  subscriptions  to  the  party 
making  the  proposal.  If  this  latter  plan  is  adopted,  the  fol- 
lowing form  will  apply: 

Form  39.     Assignment  of  Subscriptions 

Assignment  of  Subscriptions 


We,  the  undersigned,  all  the  subscribers  to  the  Common  Stock  of  the 
Imperial  Gas  Stove  Company,  for  and  in  consideration  of  the  sum  of 
One  Dollar  to  each  of  us  in  hand  paid,  and  of  other  good  and  valuable 
considerations,  the  receipt  of  which  is  hereby  acknowledged,  do  hereby 
respectively  sell,  assign,  and  make  over  unto  Richard  White  all  our  sub- 
scription rights  to   the  stock  of   said   Company ; 

Provided,  however,  that  this  assignment  is  conditioned  upon  the  ac- 
ceptance by  said  Company  of  the  proposal  of  said  Richard  White  of  this 
date  to  purchase  the  entire  Common  Stock  of  said  Company,  and  is  to 
go  into  effect  only  upon  due  tender  by  him  of  payment  for  said  Common 
Stock  in  accordance  with  the  terms  of  the  said  proposal. 

Witness  our  hands  and  seals  this  5th  day  of  December,  1917. 

George  P.  Goff 
W.  S.  Phillips 
Sidney  F.  Horner 
Warren  Calvert 
Martin  Coleman 


Under  some  circumstances  it  is  impossible  to  secure  the 
signatures  of  all  the  directors  to  a  call  and  waiver.  In  such 
case,  if  by-laws  have  been  adopted  by  the  stockholders  and  the 
first  regular  meetings  of  directors  under  these  is  near  at  hand, 
the  business  of  the  first  meeting  may  be  postponed  until  this 
regular  meeting.  Usually,  however,  a  more  immediate  meet- 
ing is  necessary,  and  in  such  case  it  must  be  assembled  by 
means  of  a  call. 

In  the  absence  of  any  conflicting  provision  in  the  by-laws, 
such  call  signed  by  a  majority  of  the  board  of  directors  will 
be  effective.     The  following  form  may  be  used. 


FIRST   MEETINGS 
Form  40.    Call  for  First  Directors'  Meeting 

Call  for  First  Meeting  of  Directors 

of  the 

MIDVALE  COAL  COMPANY 


623 


We,  the  undersigned,  directors  of  the  Midvale  Coal  Company,  hereby 
call  the  first  meeting  of  the  directors  of  said  Company  to  be  held  in  the 
office  of  John  H.  Welch,  229  Broadway,  New  York  City,  New  York,  at 
3  P.M.  on  the  2nd  day  of  January,  1918,  for  the  purpose  of  electing 
officers,  acting  upon  a  proposal  to  assign  property  to  the  Company  in  ex- 
change for  stock,  and  doing  all  such  other  things  as  may  be  necessary 
or  desirable  in  connection  with  the  organization  of  the  Company  and  the 
promotion  of  its  business. 

New  York  City,  Thomas  L.  Sherman 

December  30,  1917.  Daniel  T.  Brown 

John  H.  Welch 


Under  ordinary  conditions  the  period  between  the  send- 
ing of  notice  and  the  time  of  meeting  must  be  sufficient  to 
allow  every  member  of  the  board  to  receive  the  notice  and  be 
present  at  the  meeting.  Any  by-law  provisions  as  to  the  num- 
ber of  days  to  elapse  between  the  notice  of  the  special  meet- 
ing and  the  special  meeting  held  pursuant  thereto,  should  be 
observed. 

The  directors*  minutes  on  a  preceding  page  give  a  form  of 
resolution  for  designating  the  corporate  depositary.  This 
form  is  simple  but  sufficient  for  all  practical  purposes.  In 
many  cases,  however,  the  banks  have  their  own  forms  of 
designating  resolution  which  they  prefer  and  in  some  cases 
insist  upon.  These  forms  are  for  the  most  part  unobjection- 
able, but  in  some  cases  will  be  found  to  confer  excessive  pow- 
ers upon  the  officers  of  the  corporation.  If  this  is  not  desired, 
any  such  resolution  may  be  so  modified  as  to  meet  the  require- 
ments of  the  particular  corporation  while  still  preserving  the 
general  form  preferred  by  the  bank. 

The  banks  usually  require  the  resolution  designating  the 


624 


FORMS   AND   PRECEDENTS 


corporate  depositary  to  be  certified.  Such  certification  is  best 
made  by  the  secretary  of  the  company  and  may  be  in  the  fol- 
lowing form: 

Form  41.    Secretary's  Certificate  to  Resolution 


I,  Warren  Calvert,  Secretary  of  the  Imperial  Gas  Stove  Company, 
of  New  Jersey,  do  hereby  certify  that  the  foregoing  is  a  full  and  true 
transcript  of  a  resolution  duly  adopted  at  a  regular  meeting  of  the  Board 
of  Directors  of  the  said  Company  held  in  the  City  of  Newark,  New  Jersey, 
on  the  5th  day  of  December,  1917,  as  it  appears  on  the  minutes  of  said 
meeting ;  and  I  do  further  certify  that  George  P.  Goff  is  the  duly  elected 
President  of  said  Company,  and  W.  S.  Phillips  is  its  duly  elected  Treas- 
urer. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  official  signa- 
ture and  the  corporate  seal  of  said  Company  this  6th  day 
of  December,   1917. 
{  CORPORATE  I  Warren  Calvert, 


\      SEAL      3  Secretary 


This  certificate  appears  below  the  resolution  designating 
the  corporate  depositary  on  the  same  sheet  of  paper. 


CHAPTER   LXIX 

OPTION  AGREEMENTS 

When  a  corporation  is  to  be  formed  for  the  purpose  of 
purchasing  or  taking  over  certain  properties,  option  contracts 
are  usually  employed  to  hold  these  properties  until  the  cor- 
poration can  be  organized  and  act  for  itself.  Such  contracts, 
even  though  made  by  trustees  for  the  corporation,  are  not 
binding  upon  the  corporation  until  accepted  or  ratified  by  its 
formal  action.  In  drawing  such  contracts,  therefore,  care 
should  be  taken  that  the  parties  acting  for  the  corporation 
are  not  unintentionally  bound  or  involved  by  its  terms.  Pay- 
ments made  to  secure  the  option  are  usually  forfeited  in  case 
the  option  fails,  but  this  should  mark  the  limit  of  loss  of  the 
party  contracting  for  the  property  unless  otherwise  expressly 
agreed  and  stated  in  the  option  contract. 

Form  42.    Option  on  Capital  Stock 

Option  Agreement 


An  Agreement  made  and  entered  into  this  14th  day  of  November, 
191 7,  by  and  between  John  H,  Wyckoff  of  Philadelphia,  Pennsylvania, 
party  of  the  first  part,  and  George  Andrew  Dennison  of  New  York  City, 
party  of  the  second  part : 

Whereas,  The  said  John  H.  Wyckoff  owns  or  controls  the  capital 
stock  of  the  Wyckoff  Publishing  Company,  a  corporation  duly  organized 
under  the  laws  of  Delaware  and  carrying  on  its  business  in  the  City  of 
Philadelphia,  said  business  being  the  publication  of  "The  Tea  Table,"  a 
monthly  magazine  owned  by  the  said  Wyckoff  Publishing  Company;  and 

Whereas,  The  said  George  Andrew  Dennison  owns  or  controls  a 
monthly  magazine  known  as  "The  Daily  Menu"  and  desires  to  purchase 
and  com'nne  therewith  "The  Tea  Table,"  and  to  form  a  corporation  to 
own  and  publish  the  magazines  so  combined ; 

Now,  Therefore,  In  consideration  of  the  sum  of  Two  Hundred  and 
Fifty  Dollars    ($250)   paid  the  said  Wyckoff  by  the  said  Dennison.  the 

625 


626  FORMS   AND   PRECEDENTS 

receipt  whereof  is  hereby  acknowledged,  the  said  Wyckoff  for  himself 
and  his  associates  agrees  to  sell  to  said  party  of  the  second  part  or  his 
assigns,  at  any  time  on  or  before  the  ist  day  of  May,  1918,  all  and  sin- 
gular the  entire  right,  title,  and  interest  in  and  to  the  said  monthly 
magazine,  including  subscription  lists,  advertising  contracts,  good-will,  and 
all  things  incident  to  or  pertaining  to  said  magazine  and  its  publication ; 
or  at  the  option  of  said  party  of  the  second  part,  the  entire  capital  stock 
of  the  aforementioned  Wyckoff  Publishing  Company,  consisting  of  Four 
Hundred  (400)  Shares  of  Common  Stock  of  the  par  value  of  Forty 
Thousand  Dollars  ($40,000)  ;  the  consideration  for  the  transfer  and  as- 
signment of  said  Magazine,  or  said  capital  stock,  to  be  Twenty  Thousand 
Dollars  ($20,000)  in  cash  and  one-fourth  of  the  capitalization  of  the  cor- 
poration formed  to  take  over  said  publication. 

This  option  shall  expire  and  be  of  no  further  force  or  effect  after  the 
1st  day  of  May,  1918,  unless  on  or  before  that  date  said  Dennison  or  his 
assigns  shall  deposit  with  the  Guaranty  Trust  Company  of  140  Broad- 
way, New  York  City,  said  sum  of  Twenty  Thousand  Dollars  ($20,000) 
in  cash,  together  with  certificates  issued  in  the  name  of  John  H.  Wyckoff, 
for  one-fourth  of  the  entire  capital  stock  of  said  new  corporation,  said 
cash  and  stock  to  be  held  in  escrow  by  the  said  Guaranty  Trust  Com- 
pany and  to  be  released  and  delivered  to  the  said  Wyckoff  upon  the 
delivery  to  said  Trust  Company  of  a  duly  executed  and  valid  assignment 
of  said  Magazine  to  said  new  corporation,  or  otherwise  of  the  entire  duly 
assigned  stock  of  the  Wyckoff  Publishing  Company,  as  may  be  required 
by  the  written  demand  of  the  said  Dennison  or  his  assigns,  as  herein- 
after set  forth. 

So  soon  as  said  cash  and  stock  of  the  said  new  company  are  depos- 
ited in  escrow  as  afore  provided  with  the  Guaranty  Trust  Company,  said 
Dennison  or  his  assigns  shall  give  said  Wyckoff  written  notice  thereof 
and  shall  specify  therein  whether  said  Dennison  desires  the  assignment 
of  said  Magazine,  or  the  stock  of  the  said  Wyckoff  Publishing  Company 
in  exchange  for  the  said  escrowed  cash  and  stock,  and  said  Dennison 
shall  at  the  same  time  file  a  signed  copy  of  said  notice  with  the  Guaranty 
Trust  Company. 

It  is  understood  and  agreed  that  should  the  sale  contemplated  by 
this  present  agreement  fail,  neither  party  hereto  shall  be  liable  in  any 
way  under  or  by  reason  of  this  present  agreement,  and  that  should 
this  option  be  assigned  to  any  other  person  or  to  any  corporation,  the 
said  Dennison  shall  be  free  from  all  liability  thereunder. 

In  Witness  Whereof,  the  said  John  H.  Wyckoff  and  the  said 
George  Andrew  Dennison  have  hereunto  affixed  their  re- 
spective signatures  and  seals  the  day  and  year  first  above 
written. 

John  H.  Wyckoff  [l.  s.] 

George  Andrew  Dennison  [l.  sJ 

Attest  signatures: 

Mary  M.  Westcott 
Willis  Bennett 


In  this  option  no  provision  is  made  for  any  change  during 
the  option  period  in  the  value  of  the  property  covered.     In 


OPTION   AGREEMENTS  627 

the  option  which  follows,  such  changes  are  guarded  against 
by  means  of  the  provision  that  the  price  is  to  be  the  ap- 
praised value  at  the  time  of  purchase  plus  a  fixed  amount  for 
good-will. 

Form  43.     Option  on  Business  and  Property 
Option  Agreement 


An  Agreement  entered  into  this  25th  day  of  October,  1917,  by  and 
between  the  Oswego  Hub  and  Spoke  Company,  a  corporation  duly  or- 
ganized under  the  laws  of  the  State  of  New  York,  party  of  the  first 
part,  and  Willis  P.  Emerson  of  New  York  City,  party  of  the  second 
part. 

For  and  in  consideration  of  the  sum  of  One  Dollar  paid  said  party^of 
the  first  part  by  the  party  of  the  second  part,  receipt  whereof  is  hereby 
acknowledged,  and  for  other  good  and  valuable  considerations,  said  party 
of  the  first  part  does  hereby  agree  to  sell  to  said  party  of  the  second 
part,  as  a  going  concern,  its  entire  business,  factories, .  and  plant  for  the 
manufacture  and  sale  of  hubs  and  spokes,  owned  and  operated  by  said 
party  of  the  first  part  in  the  City  and  County  of  Oswego,  State  of  New 
York,  including  therewith  all  machinery,  tools,  and  other  property  and 
appurtenances  thereunto  belonging,  together  with  all  raw  materials  and 
manufactured  products  on  hand,  and  all  contracts  relating  to  the  pur- 
chase or  sale  of  such  materials  and  products;  also  the  good-will  of  said 
business  and  all  trade-marks,  brands,  patent  rights,  licenses,  and  shop 
rights  used  therein  and  controlled  by  said  party  of  the  first  part;  ex- 
cepting only  moneys  and  bills  and  accounts  receivable  on  hand  at  the 
time  of  sale;  all  of  said  property  to  be  delivered  free  and  clear  from 
all  liens,  charges,  encumbrances,  taxes,  and  assessments,  save  and  ex- 
cept for  a  certain  mortgage  upon  the  real  property  of  the  party  of  the 
first  part,  amounting  to  Thirty  Thousand  Dollars  ($30,000)  and  now 
on  record  in  the  office  of  the  County  Clerk  of  Oswego  County. 

The  price  to  be  paid  for  said  property  shall  be  an  arnount  Twenty 
Thousand  Dollars  ($20,000)  in  excess  of  the  actual  appraised  value,  at 
the  time  of  purchase,  of  said  real  and  personal  property,  exclusive  of 
good-will,  as  above  set  forth,  and  such  amount  shall  be  paid  in  cash  at 
the  time  of  transfer,  the  aforementioned  mortgage  being  assumed  by 
the  purchaser  and  accounted  as  a  cash  payment  to  the  amount  of  said 
sum  of  Thirty  Thousand  Dollars  ($30,000)  and  accrued  interest  thereon 
due  at  the  time. 

This  option  shall  expire  and  be  of  no  further  effect  on  and  after  the 
31st  day  of  July,  1918,  unless  prior  thereto  said  party  of  the  second 
part,  or  his  assigns  shall,  in  writing,  notify  said  party  of  the  first  part 
of  his  or  their  intention  to  exercise  the  same,  and  shall  at  that  time 
deposit  in  the  Oswego  National  Bank,  Ten  Thousand  Dollars  ($10,000) 
in  cash  as  a  guarantee  of  good  faith  and  to  apply  upon  the  purchase 
of  said  property,  and  in  such  event  the  party  of  the  first  part  shall 
within  sixty  days  of  such  notice  and  deposit,  transfer  and  convey  said 


628  FORMS   AND   PRECEDENTS 

business  and  property  by  such  deeds,  conveyances,  and  assignments  and 
other  instruments  as  may  be  necessary  to  vest  the  full  right,  title,  and 
interest  in  said  business  and  property  in  said  party  of  the  second  part 
or  his  assigns. 

It  is  further  understood  and  agreed  that  said  party  of  the  second 
part  assumes  no  responsibility  to  purchase  said  property  unless  he  or 
his  assigns  shall  elect  so  to  do  by  written  notice  and  deposit  in  bank  as 
afore  provided,  and  that  in  case  of  assignment  of  this  present  instru- 
ment by  said  party  of  the  second  part,  all  its  provisions  shall  inure  to 
the  benefit  of,  and  run  in  favor  of,  and  be  binding  upon  his  assignee 
or  assignees  in  every  respect  as  theretofore  upon  said  party  of  the  second 
part,  and  in  case  of  such  assignment  the  said  party  of  the  second  part 
shall  be  free  from  all  liability  hereunder. 

In  case  of  any  disagreement  as  to  the  terms  of  this  option  or  as  to 
any  matters  connected  with  the  exercise  thereof,  each  party  hereunto  shall 
appoint  an  arbitrator  and  the  two  so  appointed  shall  appoint  a  third, 
and  the  three  arbitrators  so  selected  shall  be  empowered  to  decide  finally 
all  matters  of  disagreement. 

In  Witness  Whereof,  the  Oswego  Hub  and  Spoke  Company, 
party  of  the  first  part  has  caused  its  corporate  name  to 
be  hereunto  signed  by  its  President  and  its  duly  attested 
seal  to  be  hereunto  affixed  by  its  Secretary,  and  the  party 
of  the  second  part  has  affixed  his  signature  and  seal,  all 
on  the  day  and  year  first  above  written. 

Oswego  Hub  and  Spoke   Company, 
(corporate)  By  James  O'Reilly, 

I      seal      3  President 

Attest  seal: 

Harris  N.  Seeley, 

Secretary 

Willis  P.  Emerson      [l.  s.] 
Witness  signature  of  W.  P.  Emerson: 
Mary  N.  Bates 
Clarence  Wymond 


Form  44.     Option  on  Real  Estate 

Option  Agreement 


This  Agreement  made  this  i8th  day  of  November,  1917,  for  the  sale  of 
Real  Estate,  by  and  between  Marcus  M.  McComb,  party  of  the  first 
part,  and  Melville  H.  Winthrop,  party  of  the  second  part,  witnesseth  as 
follows : 

I.  That  said  party  of  the  first  part  in  consideration  of  Five  Hun- 
dred Dollars  ($500)  to  him  in  hand  paid,  does  hereby  agree  to  grant  and 
convey  to  the  party  of  the   second  part,  his  heirs,   administrators,  and 


OPTION   AGREEMENTS 


629 


assigns,  all  that  certain  lot  of  land  together  with  the  buildings,  structures, 
and  improvements  thereon,  situated,  bounded,  and  described  as  follows: 

(Fiill  description) 

2.  That  said  party  of  the  first  part  hereby  agrees  to  receive  and 
accept  in  full  payment  for  the  said  property,  the  sum  of  Twenty-Five 
Thousand  Dollars  ($25,000),  payable  Ten  Thousand  Dollars  ($10,000)  cash 
on  delivery  of  deed,  and  the  remainder  in  three  equal  payments  at  one, 
two,  and  three  years  respectively,  said  deferred  payments  to  be  secured 
by  mortgage  on  the  said  property  and  to  bear  interest  at  the  rate  of  Six 
Per  Cent  (6%)  per  annum. 

3.  That  said  premises  are  to  be  conveyed  subject  to  the  following 
encumbrances. 

(Description  of  Encumbrances) 

4.  That  said  party  of  the  first  part  agrees  to  convey  said  property 
free  from  all  Hens  and  encumbrances,  save  as  above  specified,  by  such 
proper  warranty  deed  containing  full  covenants  duly  executed  and  ac- 
knowledged, as  shall  convey  and  assure  to  the  grantee  the  absolute  fee 
of  said  premises. 

Provided,  However,  That  unless  said  party  of  the  second  part  or  his 
assigns,  tenders  the  said  amount  of  Ten  Thousand  Dollars  ($10,000) 
and  duly  executed  mortgage  for  the  remainder  of  such  purchase  price 
on  or  before  March  ist,  1918,  this  agreement  shall  terminate  and  be  of  no 
force  or  effect  and  the  party  of  the  second  part  shall  forfeit  the  amount 
already  paid  on  this  Option  Contract,  but  no  further  liability  of  any  kind 
shall  be  incurred  by  either  of  the  parties  hereunto. 

Witness  the  hands  and  seals  of  the  said  parties. 

Marcus  M.  McComb  [l.  s.] 

Melville  H.  Winthrop     [l.  s.] 
In  the  presence  of 

Samuel  M.  Boswick 
Ellen  M.  Judson 

(Notarial  acknowledgment  according  to  the  law  of  the  state  in  which  the 
contract  is  executed.) 


In  the  absence  of  any  prohibiting  provisions  or  condi- 
tions, an  option  contract  is  assignable  as  is  any  other  form 
of  contract.    A  simple  option  assignment  is  as  follows: 

Form  45.    Assignment  of  Option 

Assignment  of  Option 


Whereas,  The  undersigned  holds  and  is  the  lawful  owner  of  a  certain 
Option  Contract,  executed  by  the  George  F.  Harper  Company,  of  Phila- 
delphia, Pennsylvania,  the  undertaking  of  which  is  the  sale  of  the  whole- 
sale hardware  business  now  belonging  to  and  conducted  by  the  said  George 


630 


FORMS   AND   PRECEDENTS 


F.  Harper  Company,  at  No.  1725  Chestnut  Street,  in  the  City  of  Phila- 
delphia, said  business  being  more  particularly  specified  and  described  in  the 
said  Option  Contract  hereunto  attached  and  made  part  of  this  assignment : 
Now,  Therefore,  I,  Theodore  Paflin,  in  consideration  of  the  sum  of 
One  Dollar,  the  receipt  whereof  is  hereby  acknowledged,  and  for  other 
valuable  and  sufficient  considerations,  do  by  these  presents  grant,  bargain, 
sell,  transfer  and  assign  unto  the  Allis-White  Hardware  Company,  a 
corporation  duly  organized  under  the  laws  of  the  State  of  New  York,  all 
and  singular,  my  entire  right,  title,  and  interest  in  and  to  the  said  Option 
Contract,  to  have  and  hold  the  same  to  the  proper  use  and  benefit  of  the 
said  corporation. 

Witness  my  hand  and  seal  this  i6th  day  of  December,  191 7. 

Theodore  Paflin     [l.  s.] 
Attest: 

Irvin  M.  Rogers 


CHAPTER   LXX 

CALLS    AND    WAIVERS     FOR     STOCKHOLDERS' 

MEETINGS 

Regular  meetings  both  of  stockholders  and  directors  are 
held  at  fixed  times  usually  prescribed  by  the  by-laws.  If  in 
the  interim  between  these  regular  meetings  matters  arise 
calling  for  action,  special  meetings  become  necessary.  Such 
meetings  are  assembled  either  by  the  call  and  waiver,  or  by  a 
formal  call  followed  by  notice. 

The  call  and  waiver  is  a  single  instrument  consisting  of 
two  parts;  first,  a  call  for  the  desired  meeting  and,  second, 
a  waiver  of  all  statutory,  charter,  or  by-law  requirements 
for  notice  thereof.  This  call  and  waiver  must  be  signed  by 
every  person  entitled  to  be  present  at  its  meeting.  Those 
signing  are  thereby  estopped  from  any  future  objection  to 
the  omission  of  the  usual  or  required  formalities  of  the  meet- 
ing. No  one  else  has  a  right  to  object;  hence  the  call  and 
waiver  may  be  safely  used  even  though  the  by-laws  provide  a 
different  method  of  assembling  special  meetings. 

The  call  followed  by  notice  is  the  method  of  assembling 
special  meetings  usually  prescribed  by  the  by-laws,  and  in- 
volves the  use  of  two  separate  instruments:  first,  the  call 
signed  by  some  competent  party  or  parties;  and  second,  pur- 
suant to  this  call,  a  notice  of  the  meeting.  The  call  and 
waiver  permits  of  an  immediate  meeting,  or  a  later  meeting, 
according  to  its  terms.  The  call  with  notice  involves  the  delay 
incident  to  formal  notice,  ranging  from  three  to  ten  days. 

The  first  meetings  of  both  stockholders  and  directors 
are  usually  assembled  by  means  of  calls  and  waivers.     It 

631 


632  FORMS   AND   PRECEDENTS 

is,  however,  but  seldom  that  the  call  and  waiver  is  employed 
thereafter  to  assemble  meetings  of  stockholders,  on  account 
of  the  difficulty — save  in  the  smaller  corporations — of  secur- 
ing the  signature  of  every  party  entitled  to  be  present  at  the 
meeting.  Special  meetings  of  the  directors  are  commonly 
assembled  by  means  of  the  call  and  waiver. 

Forms  of  calls  and  waivers  to  assemble  the  first  meetings 
of  stockholders  and  directors  have  already  been  presented. 
(See  Forms  31,  36.)  The  following  form  is  for  use  after 
organization : 

Form  46.     Call  and  Waiver  for  Special  Meeting 
CHELTINGHAM  LINEN  COMPANY 


Call  and  Waiver 
Special  Meeting  of  Stockholders 


We,  the  undersigned,  being  all  the  stockholders  of  the  Cheltingham 
Linen  Company  of  Trenton,  New  Jersey,  hereby  call  a  special  meeting 
of  the  stockholders  of  said  Company  to  be  held  in  the  Company's  office. 
No.  275  Main  Street,  Trenton,  New  Jersey,  on  the  21st  day  of  October, 
1917,  at  3  o'clock  in  the  afternoon,  for  the  purpose  of  considering  and 
acting  upon  a  proposition  for  the  consolidation  of  this  Company  with  the 
Wilson  Thread  Company  of  Trenton,  New  Jersey,  and  we  hereby  waive 
all  statutory  and  by-law  requirements  as  to  notice  of  time,  place,  and 
objects  of  said  meeting,  and  agree  to  the  transaction  thereat  of  any  and 
all  business  pertaining  to  the  affairs  of  the  Company. 

Trenton,  N.  J.,  James  H.  McLain  Frank  H.  Small 

October  17,  1917.  Theodore  McGowan       William  T.  Masters 

Joseph  H.  French  John  H.  Meade 

Charles  P.  Henderson  Henry  T.  Arnold 
David  B.  Adams  William  Rollands 


Where  the  number  of  stockholders  is  large,  the  call  fol- 
lowed by  notice  is  used  in  assembling  special  meetings.  The 
call  itself  authorizes  the  meeting  as  set  forth  in  its  terms. 

When  a  call  for  a  special  meeting  is  issued  by  the  presi- 
dent, it  should  be  directed  to  the  secretary. 


STOCKHOLDERS'   CALLS   aND   WAIVERS  633 

Form  47.    President's  Call  for  Special  Meeting 

HUDSON  NAVIGATION  COMPANY 

270  Broadway,  New  York 


Mr.  Henry  H.  Sheldon, 

Secretary  of  the  Hudson  Navigation  Co.: 

You  are  hereby  authorized  and  instructed  to  send  out  notice  of  a 
special  meeting  of  the  stockholders  of  this  Company  hereby  called  by 
me,  said  meeting  to  be  held  in  the  office  of  the  Company,  No.  270  Broad- 
way, New  York  City,  on  the  15th  day  of  September,  191 7,  at  10  o'clock 
A.M.,  for  the  purpose  of  considering  and  acting  upon  a  proposition  to 
sell  the  entire  property  and  assets  of  the  Company,  and  for  the  trans- 
action of  any  and  all  business  in  connection  therewith  that  may  properly 
come  before  said  meeting. 

September  i,  191 7.  Harry  M.  Moody, 

President 


This  call  is  handed  or  sent  to  the  secretary  who  there- 
upon sends  out  notices  of  the  meeting  (Form  59). 

Form  48.    President's  Call  for  Special  Meeting — Formal 

HUDSON  NAVIGATION  COMPANY 
270  Broadway,  New  York 


Mr.  Henry  H.  Sheldon, 

Secretary  of  the  Hudson  Navigation  Co. 

Dear  Sir: — 

In  accordance  with  the  authority  vested  in  me  by  the  By-laws  of  this 
Company,  I  hereby  call  a  special  meeting  of  the  stockholders  to  be  held 
in  the  office  of  the  Company,  No.  270  Broadway,  New  York,  on  the  15th 
day  of  September,  191 7,  at  10  o'clock  in  the  forenoon,  for  the  purpose  of 
considering  and  acting  upon  a  proposition  to  sell  the  entire  property  and 
assets  of  the  Company,  and  for  the  transaction  of  any  and  all  business 
in  connection  therewith  that  may  properly  come  before  said  meeting,  and 
I  hereby  authorize  and  instruct  you  to  give  due  notice  of  said  meeting  to 
the  stockholders  of  this  Company  in  accordance  with  the  requirements 
of  its  By-laws. 

September  i,  1917.  Harry  M.  Moody, 

President 


634  FORMS   AND   PTIECEDENTS 

A  directors'  call  for  a  special  meeting  of  stockholders  ( See 
Form  58)  must,  according  to  the  requirements  of  by-laws, 
be  addressed  either  to  the  president,  who  in  his  turn  instructs 
the  secretary  to  issue  notice  of  the  meeting  so  called,  or  to 
the  secretary  as  in  the  following  form,  save  when  occasionally 
the  by-laws  permit  direct  publication  notice  by  the  directors. 

Form  49.     Directors'  Call  for  Special  Meeting 

Call  for  Special  Meeting  of  Stockholders 


We,  the  undersigned,  directors  of  the  Hudson  Navigation  Company, 
do  hereby  call  a  special  meeting  of  the  stockholders  of  said  Company  to 
be  held  in  its  office,  No.  270  Broadway,  New  York,  on  the  15th  day  of 
September,  1917,  at  10  o'clock  in  the  forenoon,  for  the  purpose  of  taking 
action  on  a  proposition  to  sell  the  entire  property  and  assets  'of  the  Com- 
pany, and  for  the  transaction  of  any  and  all  business  necessary  in  con- 
nection therewith,  and  we  do  hereby  authorize  and  instruct  the  Secretary 
of  the  Company  to  send  out  notice  of  said  special  meeting  in  accordance 
with  the  by-law  requirements  of  this  Company. 

New  York  City,  New  York,  John  H.  Goodrich 

September  i,  1917.  Henry  B.  Merrill 

Arthur  C.  McCall 
To  Mr.  Henry  H.  Sheldon, 

Secretary  of  the  Hudson  Navigation  Co. 


This  call  is  handed  or  sent  to  the  secretary,  and  is  fol- 
lowed by  his  notice  of  the  meeting.  When  the  by-laws  pro- 
vide that  the  president  shall  call  special  meetings  on  written 
request  or  instruction  signed  by  a  prescribed  number  of 
directors,  the  foregoing  call  might  be  modified  to  meet  the 
conditions  as  follows: 

Form  50.     Directors'  Instructions  for  Special  Meeting 


To  Mr.  Harry  M.  Moody, 

President  of  the  Hudson  Navigation  Co.  : 
We,  the  undersigned,  directors  of  the  Hudson  Navigation  Company, 
do  hereby  authorize  and  instruct  you  to  call   a   special   meeting  of   the 
stockholders  of  said  Company,  to  be  held  in  its  office,  No.  270  Broadway, 


STOCKHOLDERS'   CALLS   AND   WAIVERS 


635 


New  York,  on  the  15th  day  of  September,  1917,  at  10  o'clock  in  the  fore- 
noon, for  the  purpose  of  taking  action  on  a  proposition  to  sell  the  entire 
property  and  assets  of  the  Company  and  for  the  transaction  of  any  and 
all  business  necessary  in  connection  therewith. 

New  York  City,  New  York,  John  H.  Goodrich 

September  i,  1917.  Henry  B.  Merrill 

Arthur  C.  McCall 


These  instructions  are  handed  to  the  president,  who  in 
accordance  therewith  issues  a  call  for  the  meeting.  (See 
Forms  47,  48.)  If  Form  48  is  followed,  the  first  phrase,  'In 
accordance  with  the  authority  vested  in  me  by  the  By-laws 
of  this  Company,"  should  be  modified  to  correspond,  as  "Pur- 
suant to  written  instructions  of  directors  of  this  Company." 

Special  meetings  of  stockholders  may  always  be  called  by 
resolution  of  the  board  of  directors. 

Form  51.     Directors'  Resolution  for  Special  Meeting 

Resolution 


Be  It  Resolved,  That  a  special  meeting  of  the  stockholders  of  this 
Company  be  and  hereby  is  called,  said  meeting  to  be  held  in  the  office 
of  the  Company  at  No.  270  Broadway,  New  York  City,  on  the  15th  day 
of  September,  1917,  at  10  o'clock  in  the  forenoon,  for  the  purpose  of 
considering  and  acting  upon  a  proposition  to  sell  the  entire  property  and 
assets  of  the  Company,  and  for  the  transaction  of  any  and  all  business 
necessary  or  desirable  in  connection  therewith. 


As  the  secretary  is  presumably  present  at  the  meeting 
or  otherwise  has  access  to  the  minutes,  the  mere  passage  of 
such  a  resolution  is  suf^cient  notice  to  him  of  the  call,  and 
he  should  send  out  notice  of  the  meeting. 

It  is  but  seldom  that  the  stockholders  issue  a  request 
or  call  for  a  meeting.  Usually  when  they  do,  it  must,  in 
accordance  with  by-law  requirements,  pass  through  the 
president's  hands.     If  not  so  prescribed,  their  call  may  be 


636 


FORMS   AND   PRECEDENTS 


addressed  to  the  secretary,  in  which  case  the  president's  only 
official  knowledge  of  the  meeting  is  derived  from  the  notice 
sent  him  by  the  secretary.  Occasionally  the  by-laws  authorize 
the  stockholders  to  give  direct  notification  of  the  meeting  by 
publication. 

Form  52.     Stockholders'  Request  for  Special  Meeting 


To  the  President  of  the 

Adams  Machine  Company: 

We,  the  undersigned,  owning  or  controlling  not  less  than  two-thirds 
of  the  entire  voting  stock  of  the  Adams  Machine  Company,  do  hereby 
request  you  to  call  a  special  meeting  of  its  stockholders  to  be  held  in  the 
office  of  the  Company  at  No.  35  Broad  St.,  New  York,  at  3  o'clock  in  the 
afternoon  on  the  19th  day  of  October,  191 7,  for  the  purpose  of  consider- 
ing the  action  of  the  directors  of  this  Company  in  purchasing,  in  opposi- 
tion to  the  expressed  wishes  of  a  majority  of  its  stockholders,  the  machine 
shop  and  equipment  of  the  Harrison  Metal  Working  Company,  located 
at  908  Willoughby  St.,  Brooklyn,  and  to  take  such  action  in  regard  thereto 
as  may  seem  necessary  or  desirable  to  the  stockholders  present  at  such 
meeting,  and  we  request  you  to  have  due  and  timely  notice  thereof  sent  to 
each  stockholder  of  this  Company. 


New  York  City,  N.  Y., 

NAME 

shares  owned 

October  i,  1917. 

David  H.  Bentley 

200 

James  J.  Allison 

250 

Oliver  P.  Chandler 

500 

Stanley  S.  Wood 

150 

Henry  M.  Sherrill 

300 

Spencer  Harrison 

150 

This  stockholders'  request  is  handed  to  the  president,  who 
may  either  indorse  his  call  on  the  request  as  in  the  form 
which  follows,  or  may  issue  a  call  as  in  Forms  47  and  48. 

Form  53.     President's  Indorsement  of  Stockholders'  Request 


To  the  Secretary  of  the 

Adams  Machine  Company: 

You  are  hereby  instructed  to  give  due  notice  of  a  special  meeting  of 
the  stockholders  of  this  Company  hereby  called  by  me  in  pursuance  of  the 
within  stockholders'  request,  said  meeting  to  be  held  in  the  office  of  the 


STOCKHOLDERS'    CALLS   AND   WAIVERS  637 

Company  at  No.  35  Broad  St.,  New  York  City,  at  3  o'clock  p.m.,  on  the 
19th  day  of  October,  191 7,  in  accordance  with  and  for  the  purposes  set 
forth  in  the  said  request. 

New  York  City,  N.  Y.,  John  H.  Harrell, 

October  2,  191 7.  President 


When  the  stockholders'  call  is  directed  to  the  secretary, 
its  form  will  be  as  follows: 

Form  54.     Stockholders'  Call  for  Special  Meeting 


To  the  Secretary  of  the 

Howard  Woolen  Mills  Co.: 
We,  the  undersigned,  stockholders  of  the  Howard  Woolen  Mills  Com- 
pany owning  or  controlling  not  less  than  two-thirds  of  its  entire  voting 
stock,  do  hereby  call  a  special  meeting  of  the  stockholders  of  the  Com- 
pany to  be  held  in  its  office  at  No.  45  Main  St.,  Dunkirk,  New  York, 
at  12  o'clock  noon  on  the  15th  day  of  October,  191 7,  for  the  purpose  of 
considering  a  proposition  to  amend  the  present  By-laws  so  as  to  restrict 
the  President's  power  to  contract  for  the  Company,  and  of  taking  such 
action  in  regard  thereto  as  may  seem  necessary  or  desirable  to  the  stock- 
holders present  at  such  meeting,  and  we  do  hereby  authorize  and  instruct 
you  to  send  out  notices  of  said  meeting  in  accordance  with  the  terms  of 
this  present  call. 

Dunkirk,  New  York,  names  shares  owned 

October  5,  191 7.  Henry  B.  Clarke  575 

Harry  H.  Howard  1200 

Frank  B.  Johnson  725 

Samuel  Furman  500 


CHAPTER   LXXI 

CALLS    AND    WAIVERS    FOR    DIRECTORS' 
MEETINGS 

Special  meetings  of  directors  are  usually  assembled  by 
means  of  calls  and  waivers,  except  where  the  board  is  large 
or  some  of  its  members  are  inaccessible.  The  common  form 
of  call  and  waiver  for  directors'  meetings  is  as  follows: 

Form  55.     Call  and  Waiver  for  Special  Meeting 

Call  and  Waiver 


Special  Meeting  of  Directc«s 


We,  the  undersigned,  all  the  Directors  of  the  Long  Island  Power 
Company  of  Flushing,  Long  Island,  do  hereby  call  a  special  meeting  of 
the  Board  of  Directors  of  said  Company  to  be  held  in  its  office  at  No. 
285  Duane  St.,  New  York  City,  at  4  o'clock  p.m.,  on  this  21st  day  of 
October,  1917,  for  the  purpose  of  acting  upon  a  proposition  for  the  sale 
of  the  Company's  Flushing  plant,  and  we  do  hereby  waive  all  statutory 
and  by-law  requirements  as  to  notice  of  time,  place,  and  purposes  of  said 
meeting,  and  consent  to  the  transaction  thereat  of  any  and  all  business 
pertaining  to  the  affairs  of  the  Company. 

New  York  City,  N.  Y.,  John  McFerguson 

October  21,  191 7.  Harold  H.  Harding 

Benton  Creller 
Howard  H.  Maurice 
Horace  Evans 


Special  meetings  of  directors  are  sometimes  irregularly 
assembled,  as  for  instance  where  all  the  members  of  a  board 
come  together  on  some  informal  notice  or  without  previous 
notice,  and  then  and  there  agree  to  waive  all  the  usual  formali- 
ties and  hold  an  immediate  meeting.     Such  meetings,  termed 

638 


DIRECTORS'    CALLS   AND   WAIVERS  639 

"consent  meetings,"  are  entirely  legal  and  are  not  uncommon 
where  boards  of  directors  or  executive  committees  are  small 
and  easily  assembled.     (  See  §  309. ) 

For  such  meetings  a  written  validation  is  not  strictly 
necessary.  The  participation  of  all  the  parties  entitled  to  be 
present,  duly  entered  on  the  minutes  of  the  meeting,  affords 
legal  evidence  of  their  consent  thereto  and  estops  any  sub- 
sequent objections  on  their  part  to  the  proceedings.  As  a 
precautionary  measure,  however,  the  secretary  should  have 
every  member  of  the  board  sign  the  minutes  of  a  consent 
meeting,  or  otherwise  sign  a  waiver  of  notice  and  agreement 
to  the  meeting  as  given  below: 

Form  56.     Agreement  for  Consent  Meeting 

HARRISON  CUTLERY  COMPANY 


Waiver' OF  Notice 


We,  the  undersigned,  all  the  Directors  of  the  Harrison  Cutlery  Com- 
pany, being  now  present,  do  hereby  consent  to  an  immediate  meeting  of 
the  Board  of  Directors  of  said  Company  to  be  held  in  the  office  of  Henry 
M.  McCall,  No.  253  Broadway,  New  York,  at  3  o'clock  p.m.  this  14th  day 
of  October,  1917,  and  we  hereby  waive  all  requirements  as  to  notice  of 
time,  place,  and  purposes  of  such  meeting,  and  agree  to  the  transaction 
thereat  of  any  and  all  business  pertaining  to  the  affairs  of  the  Company. 

Henry  H.  McCall 
Simon  Frankenstein 
James  J.  McCall 
Howard  H.  Frenkel 
Stanley  T.  Brown 


The  call  for  a  special  meeting  of  directors  must  be  signed 
as  required  by  the  by-laws — usually  by  the  president  or  a 
certain  number  of  the  directors.  A  form  of  president's  call 
is  given  on  the  following  page. 

This  call  is  handed  to  the  secretary  who,  in  accordance 
with  its  instructions,  follows  it  up  with  the  usual  notice  of 
the  meeting.     (See  Form  6y,) 


640  FORMS   AND   PRECEDENTS 

Form  57.    President's  Call  for  Special  Meeting 


CORLISS  TYPEWRITER  COMPANY 
35  Vesey  St.,  New  York 


October  i,  1917 
Mr.  John  H.  Hammond 

Secretary  Corlis3   Typewriter  Co. 
Dear   Sir  : — 

In  accordance  with  the  authority  vested  in  me  by  the  By-laws  of 
this  Company,  I  hereby  call  a  special  meeting  of  the  Board  of  Directors 
to  be  held  in  office  of  the  Company  on  the  15th  day  of  October,  1917, 
at  3  o'clock  in  the  afternoon,  for  the  purpose  of  considering  and  acting 
upon  the  appointment  of  a  Western  selling  agent,  and  for  the  transac- 
tion of  any  other  business  in  connection  therewith  that  may  be  neces- 
sary and  you  are  hereby  authorized  and  instructed  to  send  out  notices 
of  said  meeting  as  required  by  the  By-laws  of  this  Company. 

John  H.  Phillips, 

President 


The  by-laws  frequently  provide  that  special  meetings  of 
the  board  may  be  called  by  a  certain  number  of  the  directors. 
This  call  is  usually  addressed  as  in  the  following  form  and 
handed  to  the  secretary  direct. 

Form  58.    Directors'  Call  for  Special  Meeting 

Call  for  Special  Meeting  of  Directors 


We,  the  undersigned,  Directors  of  the  Westchester  Brewing  Com- 
pany, hereby  call  a  special  meeting  of  the  Directors  of  said  Company,  to 
be  held  in  its  office.  No.  1575  St.  Nicholas  Ave.,  New  York,  on  the  7th 
day  of  October,  1917,  at  il  o'clock  a.m.,  for  the  purpose  of  considering 
and  acting  upon  a  proposition  to  purchase  the  plant  and  equipment  of  the 
Harrison  Brewery,  and  for  the  transaction  of  any  and  all  business  neces- 
sary in  connection  therewith,  and  we  hereby  instruct  the  Secretary  of  the 
Company  to  send  out  notices  of  said  special  meeting  in  accordance  with 
the  By-law  requirements  of  this  Company. 

New  York  City,  Henry   C.    Carson 

October  i,  1917  Frank  H.  Merrill 

Samuel    Frenkel 
To  Mr.  John  H.  Hersey, 

Secretary  Westchester  Brewing   Co. 


CHAPTER   LXXir 

NOTICES  OF  MEETINGS 

Every  person  entitled  to  be  present  at  a  corporate  meeting 
is  also  entitled  to  notice  of  such  meeting.  If  the  notice  to 
be  given  is  prescribed  by  the  charter,  by-laws,  or  statutes, 
this  is  always  sufficient,  but,  if  not  so  determined,  "reason- 
able notice"  is  then  necessary  and  this  requires  such  notice  as 
will  under  ordinary  circumstances  enable  the  parties  notified 
to  attend  without  being  specially  inconvenienced. 

Notice  of  a  special  meeting  must  accord  as  to  the  time, 
place,  and  purposes  thereof  with  the  call  by  which  the  meet- 
ing is  authorized.  The  authority  under  which  it  is  issued 
should  be  stated  in  the  notice. 

Form  59.    Notice  of  Special  Meeting  of  Stockholders 

HUDSON  NAVIGATION  COMPANY 

New  York  City,  New  York, 
September  r,  1917 
Mr.  Arthur  C.  McCall, 

227  Broadway,  New  York. 
Dear  Sir: 

You  are  hereby  notified  that  pursuant  to  the  call  of  the  President,  a 
special  meeting  of  the  stockholders  of  the  Hudson  Navigation  Company 
will  be  held  in  the  office  of  the  Company,  No.  270  Broadway,  New  York, 
on  the  15th  day  of  September,  1917,  at  10  o'clock  a.m.,  for  the  purpose 
of  considering  and  acting  upon  a  proposition  to  sell  the  entire  property 
and  assets  of  the  Company,  and  for  the  transaction  of  any  and  all 
business  in  connection  therewith  that  may  properly  come  before  said 
meeting. 

Yours  very  truly, 

Henry  H.  Sheldon, 

Secretary 


(For  president's  call,  see  Forms  47,  48.) 
641 


642  FORMS   AND   PRECEDENTS 

When  notice  of  a  special  meeting  is  to  be  published,  the 
following  form  is  frequently  used.  The  same  form  also 
serves  as  a  notice  to  be  sent  by  mail. 

Form  60.     Publication  Notice  of  Special  Meeting  of  Stock- 
holders 

HUDSON  NAVIGATION  COMPANY 
270  Broadway,  New  York 


Notice  is  hereby  given  that  a  special  meeting  of  the  stockholders  of 
the  Hudson  Navigation  Company  will  be  held  in  the  office  of  the  Com- 
pany, No.  270  Broadway,  New  York  City,  on  the  15th  day  of  September, 
1917,  at  10  o'clock  in  the  forenoon,  for  the  purpose  of  considering  and 
acting  upon  a  proposition  to  sell  the  entire  property  and  assets  of  the 
Company,  and  for  the  transaction  of  any  and  all  business  in  connection 
therewith  that  may  properly  come  before  said  meeting. 

By  order  of  the  President. 

New  York  City,  N.  Y.,    .  Henry  H.  Sheldon, 

September  i,   1917  Secretary 


The  following  gives  an  excellent  form  of  notice  for  a 
special  meeting  of  stockholders. 

Form  61.     Publication  Notice  of  Special  Meeting  of  Stock- 
holders 

WESTERN  PACIFIC  RAILROAD  COMPANY 


Special  Meeting  of  Stockholders 


120  Broadway,  New  York, 
March  26,  1916 
To  the  Stockholders  of  the 

Western  Pacific  Railroad  Company: 
Notice  is  hereby  given  that  a  special  meeting  of  the  stockholders  of 
Western  Pacific  Railroad  Company  has  been  called  by  the  Board  of  Di- 
rectors to  convene  at  the  office  of  the  Company  at  Salt  Lake  City,  in  the 
State  of  Utah,  on  the  5th  day  of  May,  1916,  at  10  o'clock  a.m.,  for  the 
purpose  of  considering  and  acting  upon  the  following  propositions,  viz.: 

(Purposes  omitted.) 


NOTICES    OF   MEETINGS  643 

The  books  for  the  transfer  of  the  stock  (both  preferred  and  common) 
will  be  closed  for  the  purpose  of  the  meeting,  at  12  o'clock  noon,  on  the 
nth  day  of  April,  1916,  and  will  be  reopened  at  10  o'clock  a.m.  on  the 
6th  day  of  May,  1916. 

By  order  of  the  Board  of  Directors. 

John  Hamilton, 

Secretary 


Notice  of  the  annual  meeting  must  be  sent  out  in  ac- 
cordance with  the  requirements  of  the  by-laws. 

Form  62.    Notice  of  Annual  Meeting 

HARMON  PUBLISHING  COMPANY 
765  Main   St.,   Dover,   Delaware 


October  i,  1917. 
Mr.  Francis  H.  Jamieson, 

336  Ocean  Ave.,  Atlantic  City,  N.  J. 

Dear  Sir: 

You  are  hereby  notified  that  the  annual  meeting  of  the  stockholders 
of  the  Harmon  Publishing  Company  will  be  held  at  the  office  of  the 
Company  in  Dover,  Delaware,  on  Tuesday,  October  13,  1917,  at  10  o'clock 
a.m.,  for  the  elections  of  five  Directors  for  the  ensuing  year  and  for 
the  transaction  of  such  other  business  as  may  come  before  the  meeting. 

The  stock  transfer  books  of  the  Company  will  be  closed  at  3  o'clock 
p.m.,  October  5,  1917,  and  remain  closed  until  10  o'clock  a.m.,  October 

^4.   1917. 

Respectfully, 

James  H.  Howard, 

Secretary 


Form  63.     Notice  of  Annual  Meeting  (U.  S.  Steel  Corp.) 
UNITED   STATES   STEEL   CORPORATION 


Notice  of  Annual  Meeting  of  April  16,  1917 


Notice  hereby  is  given  that  the  Annual  Meeting  of  the  Stock- 
holders of  the  United  States  Steel  Corporation  will  be  held  at  the 
principal  office  of  the  Corporation,  at  the  Hudson  Trust  Company,  No. 
51   Newark  Street,  in  the  City  of   Hoboken,   County  of  Hudson,   New 


644  FORMS   AND   PRECEDENTS 

Jersey,  on  Monday,  the  sixteenth  day  of  April,  1917,  at  12  o'clock  noon,  for 
the  transaction  of  any  and  all  business  that  may  come  before  the  meet- 
ing, including  considering  and  voting  upon  the  approval  and  ratification 
of  all  purchases,  contracts,  acts,  proceedings,  elections,  and  appointments 
by  the  Board  of  Directors  or  the  Finance  Committee  since  the  Annual 
Meeting  of  the  Stockholders  on  April  17,  1916;  and  all  matters  referred 
to  in  the  Annual  Report  to  Stockholders  for  the  fiscal  year  ending  De- 
cember 31,  1916,  and  in  the  proceedings  of  the  Board  of  Directors,  which 
until  the  meeting  will  be  open  to  examination  by  stockholders  of  record 
during  business  hours  at  the  New  York  Office  of  the  Corporation,  71 
Broadway ;  the  election  of  five  Directors  to  hold  office  for  three  years ; 
and  the  election  of  independent  auditors  to  audit  the  books  and  accounts 
of  the  Corporation  at  the  close  of  the  fiscal  year. 

The  stock  transfer  books  will  be  closed  at  the  close  of  business  on 
Friday,  the  i6th  day  of  March,  1917,  and  will  be  re-opened  at  10  o'clock 
in  the  morning  of  Tuesday,  April  2,  1917. 

Richard  Trimble, 

Secretary 

Hoboken,  New  Jersey, 
February  27,  1917. 


As  the  stock  of  the  Corporation  should  be  represented  as  fully  as 
possible  at  the  annual  meeting,  Stockholders  who  do  not  expect  to  attend 
in  person,  and  who  wish  to  vote  as  therein  indicated,  may  sign  the 
attached  proxy  and  return  the  same  in  the  accompanying  envelope 
addressed  to  United  States  Steel  Corporation,  Transfer  Office,  71  Broad- 
way, New  York. 

In  view  of  the  very  considerable  amount  of  detail  necessary  to  pre- 
pare for  this  meeting,  it  is  desired  that  a  proxy  shall  be  returned  at  as 
early  a  date  as  possible  by  every  Stockholder. 

A  copy  of  the  Annual  Report  will  be  mailed  to  each  Stockholder 
of  record  under  a  separate  cover  and  will  be  submitted  at  the  meeting. 

Richard  Trimble, 

Secretary 


This  is  an  unusually  long  notice  and  few  corporations  will 
find  it  necessary  to  go  into  so  much  detail.  It  would  seem 
better  form  to  confine  the  notice  proper  to  the  time,  place, 
and  election  of  directors  and  then  refer  to  the  other  matters 
set  forth  below. 

In  a  number  of  states  the  statutes  require  the  publica- 
tion of  the  notice  of  the  annual  meeting.  The  following 
forms  are  suitable  for  this  purpose.  Form  62  may  also  be 
easily  modified  to  serve  as  a  publication  notice. 


NOTICES    OF   MEETINGS 
Form  ^4.    Publication  Notice  of  Annual  Meeting 

HARMON  PUBLISHING  COMPANY 
765  Main  St.,  Dover,   Delaware 


645 


October   i,    1917. 

Notice  is  hereby  given  that  the  annual  meeting  of  the  stockholders 
of  the  Harmon  Publishing  Company  will  be  held  at  the  office  of  the 
Company  at  765  Main  St.,  Dover,  Delaware,  October  13,  1917,  at  10 
o'clock  A.M.,  for  the  election  of  five  Directors  and  for  the  transaction  of 
such  other  business  as  may  be  brought  before   said  meeting. 

The  stock  transfer  books  of  the  Company  will  be  closed  at  3  o'clock 
P.M.,  October  5,  1917,  and  remain  closed  until  10  o'clock  a.m.,  October 
14,  1917. 

James  H.  Howard, 

Secretary 


Form  65.    Publication  Notice  of  Annual  Meeting 

NEW  YORK  LOAN  AND  IMPROVEMENT  CO. 

New  York,  June   12,   1917. 

The  Annual  Meeting  of  the  Stockholders  of  the  New  York  Loan  and 
Improvement  Company,  for  the  election  of  nine  Directors,  and  two  in- 
spectors of  election  and  transaction  of  such  other  business  as  may 
properly  come  before  the  meeting,  will  be  held  at  the  office  of  the  com- 
pany, No.  51  Wall  Street,  New  York  City,  on  Tuesday,  July  16,  1917, 
at  12  o'clock  noon.    The  polls  will  be  open  from  12  m  to  i  p.m. 

F.   S.   Rollins, 

Secretary 


Form  66.     Publication  Notice  of  Annual  Meeting  (U.  P.  R. 
R.  Co.) 

WESTERN   PACIFIC  RAILROAD   COMPANY 

Annual  Meeting 

120  Broadway,   New  York, 
August  13,  1916. 

The  Annual  Meeting  of  the  stockholders  of  Western  Pacific  Railroad 
Company  will  be  held  at  the  office  of  the  Company  in  Salt  Lake  City, 
Utah,  on  Tuesday,  October  15,  1917,  at  twelve  o'clock  noon,  for  the  fol- 


646  FORMS   AND   PRECEDENTS 

lowing  purposes,  viz.:  (i)  To  elect  fifteen  Directors;  (2)  .  .  .  .;  and 
(3)  To  transact  all  such  other  business  as  may  legally  come  before 
the  meeting,  including  the  approval  and  ratification  of  all  action  of  the 
Board  of  Directors  and  of  the  Executive  Committee  since  the  last 
Annual   Meeting  of   the   stockholders   of   the    Company. 

For  the  purposes  of  the  meeting  the  books  for  the  transfer  of  stock, 
both  preferred  and  common,  will  be  closed  at  3  o'clock  p.m.  on  Monday, 
September  14,  1916,  and  will  be  reopened  at  10  o'clock  a.m.  on  Wednes- 
day, October   14,   1916. 

John   Hamilton, 

Secretary 


Form  67.    Notice  of  Special  Meeting  of  Directors 

HYDRO-CARBON   STEEL  COMPANY 
134  West  23rd  St.,  New  York  City 


September  15,  1917. 
Mr.  Walter  H.  Sinclair, 

Montclair,  New  Jersey. 
Dear  Sir: 

You  are  hereby  notified  that  pursuant  to  call  of  the  President,  a 
special  meeting  of  the  Board  of  Directors  of  this  Company  will  be  held 
in  its  office  at  3  o'clock  p.m.  on  the  i8th  day  of  September,  1917,  to 
act  upon  a  proposition  to  purchase  the  plant  of  the  Scranton  Foundry 
Company  and  to  transact  such  other  business  in  connection  therewith  as 
may  be  necessary  or  desirable. 

Respectfully, 

Milton  H.  Sanderson, 

Secretary 


This  notice  must  be  sent  to  every  member  of  the  board. 
The  time,  place,  and  purpose  of  the  meeting  must  be  stated, 
and,  unless  every  member  of  the  board  is  present  and  agrees 
thereto,  no  business  may  be  transacted  at  the  meeting  save 
that  so  specified. 

The  following  notice  is  the  usual  formal  notice  of  the 
regular  meeting  of  directors.  If  desired,  a  printed  form 
could  be  used  with  blanks  for  the  dates  and  addresses. 


NOTICES   OF   MEETINGS 
Form  68.    Notice  of  Regular  Meeting  of  Directors 

HYDRO-CARBON  STEEL  COMPANY 
134  West  23rd  St.,  New  York  City 


647 


October   i,   1917. 
Mr,  Walter  H.  Sinclair, 

Montclair,  New  Jersey. 
Dear  Sir: 

You  are  hereby  notified  that  the  regular  quarterly  meeting  of  the 
Board  of  Directors  of  the  Hydro-Carbon  Steel  Company  will  be  held 
in  the  office  of  the  Company,  No.  134  West  23rd  St.,  New  York,  on 
Tuesday,  October  13,  191 7,  at  3  o'clock  p.m. 

Respectfully, 

Milton  H.  Sanderson, 

Secretary 


It  is  but  rarely  that  publication  notices  are  used  in  as- 
sembling directors'  meetings.  Either  of  the  foregoing  notices 
might  be  readily  modified,  if  desired,  to  serve  as  a  publication 
notice.  Consent  meetings,  from  their  nature,  neither  permit 
nor  require  any  formal  notice.     (See  §  309.) 


CHAPTER    LXXIII 

FORMS  OF  PROXIES 

A  proxy  is  merely  a  special  power  of  attorney  and  may 
convey  any  authority  the  maker  desires  up  to  the  limit  of 
his  own. 

The  powers  conferred  by  a  proxy  are  limited  strictly  to 
those  specified.  Thus,  a  proxy  to  vote  on  a  proposed  amend- 
ment of  the  charter  at  a  certain  meeting  would  not  authorize 
the  holder  to  vote  also  upon  a  proposed  amendment  of  the 
by-laws  though  considered  at  the  same  meeting. 

The  time  for  which  a  proxy  runs  is  also  governed  strictly 
by  the  provisions  of  the  instrument  unless  sooner  terminated 
by  statutory  or  by-law  provisions,  or  by  the  death  of  the  maker, 
or  by  the  sale  of  his  stock,  or  by  his  formal  revocation  filed 
with  the  secretary,  or,  for  the  meetings  at  which  he  appears, 
by  the  presence  and  participation  thereat  of  the  maker.^  A 
proxy  given  for  a  particular  meeting  holds  good  for  any 
meeting  adjourned  therefrom,  whether  so  specified  in  the 
proxy  or  not. 

"A  proxy  should  be  in  writing,  but  it  need  not  be  in 
any  particular  form ;  it  need  not  be  acknowledged  or  proved, 
but  it  must  be  in  such  a  shape  as  reasonably  to  satisfy  the  in- 
spectors of  election  of  its  genuineness  and  validity."^  To 
meet  this  requirement  the  proxy  should  be  signed  and  sealed 
by  the  maker  and  be  witnessed  by  at  least  one  person,  but 
does  not  ordinarily  require  acknowledgment.  It  may  cover 
all  or  any  part  of  the  stock  owned  by  an  individual,  and  two 


Chapman  v.    Bates,   N.   J.    Eq,   658   (1900) ;    Commonwealth  v.    Patterson,    158   Pa. 
,76  (1893).      ^ 
'  2  Cook  on  Corp.,  §  610. 


St.  476  (1893) 
3ok  I 


648 


FORMS   OF    PROXIES  649 

or  more  proxies  may  be  given  by  a  single  stockholder,  each 
proxy  covering  a  part  of  his  holding. 

A  proxy  may  be  revoked  by  the  maker  at  any  time  even 
though  by  its  terms  the  proxy  is  irrevocable.  The  only  ex- 
ception to  this  rule  is  where  occasionally  a  proxy  is  coupled 
with  an  interest  in  the  stock  on  which  the  proxy  is  given. 
The  revocation  of  a  proxy  should  be  in  writing  and  be 
filed  with  the  secretary  of  the  meeting.  The  mere  pres- 
ence of  the  owner  of  the  stock  at  any  meeting,  with  the 
express  intention  of  voting  his  stock  thereat,  has  the  effect 
of  revoking  for  that  meeting  all  outstanding  proxies  given 
by  him.  If  a  proxy  is  issued  while  a  prior  proxy  for  the 
same  stock  is  outstanding,  a  revocation  of  the  first  proxy 
should  be  incorporated  in  the  second.  Should  this  not  be 
done,  the  more  recent  proxy  will  on  presentation  revoke  the 
first,  but  the  absence  of  formal  revocation  is  a  suspicious 
circumstance,  liable  to  provoke  inquiry  and  cause  trouble. 

Notices  of  the  annual  meetings  of  the  larger  corpora- 
tions are  usually  accompanied  by  proxy  forms,  which  stock- 
holders unable  to  be  present  at  the  meeting  in  person  are 
requested  to  sign  and  send  in  to  the  corporate  officials.  In 
this  way  a  quorum  is  often  secured  when  otherwise  it  would 
fail.  The  plan  is  sometimes  utilized  with  much  effect  for 
the  purpose  of  securing  a  majority  for  some  measure  favored 
by  the  directors  of  the  company,  or  to  secure  the  re-election  of 
the  present  directors. 

Proxies  sent  with  notices  of  meetings  sometimes  name 
the  parties  to  act,  but  are  frequently  sent  out  without,  and  are 
then  usually  returned  signed  in  blank;  i.e.,  while  duly  signed 
and  witnessed,  the  name  of  the  person  who  is  to  act  as  proxy 
is  omitted.  The  name  of  the  secretary  or  someone  else  pres- 
ent at  the  meeting  is  then  inserted  and  the  instrument  so  com- 
pleted is  legally  effective. 

Proxies   signed   in   blank   are   usually   employed   in   any 


650  FORMS   AND   PRECEDENTS 

case  where  the  name  of  the  party  to  act  has  not  been  definitely 
decided  upon  or  where  it  is  immaterial.  In  this  shape  the 
proxy  can  be  used  by  anyone  into  whose  hands  it  may  come. 
When  once  completed,  however,  by  the  insertion  of  the  name 
of  the  party  to  act,  it  can  be  used  only  by  the  specified  party, 
nor  can  this  party  authorize  anyone  else  to  vote  the  stock 
covered  by  the  proxy  unless  the  proxy  itself  distinctly  con- 
fers upon  him  full  rights  of  substitution. 

Directors  cannot  give  proxies  authorizing  others  to  repre- 
sent and  vote  for  them  at  directors'  meetings.  The  directors 
occupy  a  position  of  trust  and  they  cannot  as  individuals 
delegate  the  trust  vested  in  them  to  others.  This  is  a  settled 
principle  of  law. 

When  the  proxies  are  to  be  used  they  are  filed  with  the 
secretary  of  the  meeting.  If  the  holder  desires  to  retain 
his  original  proxy,  he  may,  after  exhibiting  the  original,  file 
a  certified  copy  with  the  secretary  of  the  meeting. 

Form  69.    Proxy — Simple  Form 

Proxy 


I  hereby  appoint  George  H.  Brewer  my  proxy  with  full  authority  to 
vote  for  me  and  in  my  place  at  any  and  all  stockholders'  meetings  of  the 
Brewer  Plow  Company. 

Witness  my  hand  and  seal  this  7th  day  of  October,  191 7. 

Harold  J.  McCormick     [l.  s.] 
Witnessed  by 
Henry  F.  Simmons 


This  proxy  is  under  most  circumstances  legally  sufficient 
and  the  powers  it  conveys  are  broad.  A  more  formal  proxy  is, 
however,  desirable  when  important  matters  are  to  be  con- 
sidered. The  proxy  which  follows  is  still  simple  as  to  form 
but  more  specific  in  its  terms. 


FORMS   OF   PROXIES  651 

Form  70.     Proxy — Unlimited 

— •.__—_ — ______ ___ _ ___ _________< 

Proxy 


I,  the  undersigned,  do  hereby  constitute  and  appoint  George  J.  Mc- 
Clelland my  true  and  lawful  attorney  to  represent  me  at  any  and  all  meet- 
ings of  the  stockholders  of  the  Carney  Falls  Power  Company,  and  for 
me  and  in  my  name  and  stead  to  vote  thereat  upon  the  stock  standing  in 
my  name  on  the  books  of  said  Company  at  the  times  of  said  meetings, 
and  I  hereby  grant  my  said  attorney  all  the  powers  that  I  should  myself 
possess  if  personally  present  thereat. 

Witness  my  signature  and  seal  this  15th  day  of  August,  1917. 

Harold  B.  McClelland    [l.  s.] 
In  the  presence  of 

Alphonse  H.  Duret 


At  the  expiration  of  the  specified  term  the  following  proxy 
becomes  null  and  void  without  formal  revocation  or  other 
action  on  the  part  of  the  maker. 


Form  71.    Proxy — Time  Limited 

Proxy 


I,  the  undersigned,  do  hereby  constitute  and  appoint  Henry  M.  Wil- 
liams my  true  and  lawful  attorney  to  represent  me  at  all  meetings  of  the 
stockholders  of  the  Carney  Falls  Power  Company  held  on  or  prior  to  the 
15th  day  of  June,  1917,  and  do  hereby  authorize  and  empower  him  for 
me  and  in  my  name  and  stead  to  vote  at  such  meetings  upon  the  stock 
now  standing  in  my  name  on  the  books  of  said  Company,  and  I  hereby 
grant  my  said  attorney  all  the  power  at  said  meetings  that  I  should  my- 
self possess  if  personally  present  thereat. 

Witness  my  signature  and  seal  this  ist  day  of  August,  1916. 

Samuel  B.  Fremont    [l.  s.l 
In  the  presence  of 
J.  J.  Masterson 


It  should  be  noted  that  the  wording  of  the  foregoing 
proxy  authorizes  the  appointee  to  vote  only  upon  the  stock 
"now  standing  in  my  name."  Should  the  maker  acquire 
additional  stock  of  the  company  after  the  date  of  this  proxy 


6^2  FORMS   AND   PRECEDENTS 

but  during  its  life,  such  additional  stock  is  not  covered  by 
the  proxy.  In  this  the  proxy  differs  from  the  proxy  of  Form 
70  which  covers  all  stock  owned  by  the  maker  "at  the  times 
of  said  meetings." 

Form  72.    Proxy — Particular  Meeting 

Proxy 


Know  Aul  Men  by  These  Presents: 

That  I,  the  undersigned,  do  hereby  constitute  and  appoint  Kenneth 
J.  Johnson  my  true  and  lawful  attorney  with  full  powers  of  substitution 
and  revocation,  to  represent  me  at  the  special  meeting  of  stockholders  of 
the  Graham  Navigation  Company,  to  be  held  on  the  19th  day  of  October, 
1917,  at  3  o'clock  P.M.,  and  do  hereby  authorize  and  empower  him  to 
vote  at  said  meeting  and  at  any  adjournment  thereof,  for  me  and  in  my 
name  and  stead,  upon  the  stock  then  standing  in  my  name  on  the  books  of 
said  Company,  and  I  hereby  grant  my  said  attorney  all  the  powers  that  I 
should  possess  if  personally  present  at  said  meeting. 

Witness  my  signature  and  seal  this  ist  day  of  October,  1917. 

Melver  M.  McKim     [l.  s.] 
In  the  presence  of 

Henry  P.  Swenton 


Outside  its  limitation  as  to  time,  the  preceding  proxy 
is  broad.  It  not  only  covers  all  stock  held  in  the  name  of 
the  maker  at  the  time  of  meeting  and  empowers  the  ap- 
pointee to  act  as  fully  and  with  the  same  authority  as  the 
owner  might  himself,  but  also  empowers  him  to  give  and 
revoke  proxies  conveying  similar  voting  powers  to  others. 
If  it  is  not  desired  to  convey  these  latter  powers,  the  words 
"with  full  power  of  substitution  and  revocation"  should  be 
omitted. 

If  all  the  stock  covered  by  a  proxy  is  disposed  of  before 
the  date  of  meeting,  such  proxy  is  thereby  nullified.  If  part 
of  the  stock  is  sold,  the  proxy  still  holds  for  the  remaining 
stock.  If  a  proxy  specifies  the  number  of  shares  of  stock  to 
be  voted  upon,  such  proxy  is  good  for  the  number  of  shares 
standing  in  the  maker's  name  up  to  the  specified  number. 


FORMS   OF   PROXIES  653 

Form  73.    Proxy — Limited  as  to  Stock 

Proxy 


I,  the  undersigned,  do  hereby  nominate  and  appoint  John  H.  Mc- 
Cracken  my  true  and  lawful  attorney,  for  me  and  in  my  name,  place,  and 
stead  to  vote  at  all  stockholders'  meetings  of  the  Fowler  Watch  Com- 
pany upon  Twenty-five  Shares  of  the  stock  of  said  Company  standing  in 
my  name,  and  I  hereby  grant  my  said  attorney  all  the  powers  as  to  said 
Twenty-five  Shares  of  stock  that  I  would  myself  possess  if  personally 
present  at  such  meetings. 

Witness  my  signature  and  seal  this  loth  day  of  October,  191 7. 

Francis  P.  Sterling 

In  the  presence  of 
Harry  H.  French 


The  preceding  form  may  be  used  when  but  a  portion 
of  the  stock  owned  by  a  stockholder  is  to  be  represented 
by  his  proxy.  A  single  stockholder  may  give  several  such 
proxies  to  cover  his  entire  holding  of  stock,  the  object  being 
to  admit  several  representatives  to  the  proceedings  of  the 
meeting. 

The  preceding  proxy  does  not  convey  any  greater  or 
more  complete  powers  than  the  shorter  forms  heretofore 
considered,  but  is  more  specific  and  conventional  and  therefore 
preferable  when  matters  of  importance  are  to  be  considered 
and  acted  upon. 

Form  74.    Proxy — Annual  Meeting — Formal 

Proxy 


Know  All  Men  by  These  Presents  : 

That,  we,  the  undersigned,  stockholders  of  the  Carney  Falls  Power 
Company,  do  hereby  constitute  and  appoint  J.  Adam  McCall  our  true  and 
lawful  attorney  with  full  power  of  substitution  and  revocation,  for  us  and 
in  our  names,  place,  and  stead  to  vote  upon  the  stock  then  standing  in  our 
respective  names  upon  the  books  of  said  Company,  at  the  annual  meeting 
of  the  stockholders  thereof  to  be  held  in  the  office  of  the  Company,  425 
Fifth  Ave.,  New  York  City,  January  15,  191 7,  at  10  o'clock  in  the  fore- 


654  FORMS   AND   PRECEDENTS 

noon,  and  at  any  meeting  postponed  or  adjourned  therefrom,  hereby 
granting  to  our  said  attorney  full  power  and  authority  to  act  for  us  and 
in  our  names  and  stead  to  vote  thereat  upon  our  said  stock  in  the  elec- 
tion of  directors  and  in  the  transaction  of  such  other  business  as  may  be 
brought  before  the  said  meeting,  all  as  fully  as  we  might  or  could  do  if 
personally  present,  and  we  hereby  ratify  and  confirm  all  that  our  said 
attorney  or  his  substitute  shall  lawfully  do  at  such  meeting  in  our  names, 
place  and  stead. 

In  Witness  Whereof,  we  have  hereunto  affixed  our  respec- 
tive signatures  and  seals  this  2nd  day  of  November,  1916. 

S.  S.  FOLSOM 


In  the  presence  of 

William  J.  Hammond 
as  to  S.  S.  Folsom 
and  Henry  M.  Cleveland 

Jerry  T.  McAllister 
as  to  J.  B.  McLain 
and  Sargent  McLain 


Henry  M.  Cleveland 
J.   B.   McLain 
Sasg£nt  McLain 


L.  s/ 
l.  s. 
L.  s. 


If  the  corporate  stock  is  held  in  the  name  of  the  owner 
corporation,  the  proxy  might  be  given  under  the  corporate 
name  as  in  the  following  general  form. 

Form  75.    Corporate  Proxy 

Proxy 


Know  All  Men  by  These  Presents  : 

That  the  Steel  Company  of  the  Republic,  a  corporation  organized 
under  the  laws  of  the  State  of  Pennsylvania,  owning  and  holding  Five 
Hundred  Shares  of  the  Capital  Stock  of  the  Howard  Welding  Company 
of  New  York  City,  does  hereby  constitute  and  appoint  Frederick  W. 
Morton  of  New  York  City  its  true  and  lawful  attorney  to  attend  the 
annual  meeting  of  the  aforesaid  Howard  Welding  Company  to  be  held  in 
its  office.  No.  22  Broad  St.,  New  York,  on  October  10,  191 7,  at  10  o'clock 
in  the  forenoon,  and  thereat  for  this  Company  and  in  its  name,  place, 
and  stead  to  vote  upon  the  said  Five  Hundred  Shares  of  stock,  and  to  do 
all  such  other  things  competent  to  a  stockholder  of  said  Howard  Welding 
Company,  as  may  in  his  judgment  be  necessary  or  advantageous  for  the 
interests  of  this  Company,  and  to  that  end  the  said  Steel  Company  of  the 
Republic  does  hereby  grant  to  its  said  attorney  for  said  meeting,  and  for 
any  meetings  adjourned  therefrom,  any  and  all  powers  belonging  to  or 
pertaining  to  this  Company  as  a  stockholder  of  the  aforesaid  Howard 


FORMS   OF    PROXIES 


6SS 


Welding  Company,  hereby  ratifying  and  confirming  all  that  its  said  at- 
torney may  lawfully  do  at  said  meeting  in  its  name,  place  and  stead. 

In  Witness  Whereof,  the  President  and  Secretary  of  the 
said  Steel  Company  of  the  Republic,  duly  authorized  thereto, 
have  hereunto  affixed  the  signature  and  seal  of  their  said 
Company,  all  being  done  in  the  City  of  Philadelphia, 
Pennsylvania,  on  this  3rd  day  of  October,  191 7. 

Steel  Company  of  the  Republic, 
(corporate)  By  John  H.  Sherman, 

I      seal      3  President 

Attest  seal: 

William  M.  McDonald, 

Secretary 


In  some  states  the  statutes  empower  the  corporate  officials 
to  vote  the  stock  of  other  corporations  held  by  their  cor- 
poration. In  such  case  no  proxy  is  necessary,  but  a  certifica- 
tion that  the  official  representing  the  company  is  its  official, 
properly  representing  the  company,  is  required. 

Form  76.    Revocation  of  Proxy 

Revocation  of  Proxy 


Know  All  Men  by  These  Presents  : 

That  I,  the  undersigned,  do  hereby  revoke  and  annul  any  and  all 
proxies  or  powers  of  attorney  heretofore  given  by  me,  authorizing  or 
empowering  any  person  or  persons  to  represent  me,  or  vote  in  my  name 
and  stead  or  act  for  me  in  any  way  whatsoever  at  any  meeting  or  meet- 
ings of  the  stockholders  of  the  Carney  Falls  Power  Company. 

Witness  my  signature  and  seal  this  loth  day  of  October,  1917. 

Daniel  H.  Ronalds      [l.  s.] 
In  the  presence  of 
John  H.  Dunn 


The  foregoing  revocation  of  outstanding  proxies  is 
sweeping  in  its  terms.  If  some  particular  proxy  is  to  be 
excepted  from  the  general  revocation,  such  proxy  may  be 
specifically  reserved,  or  otherwise  the  revocation  may  itself 
be  limited  by  its  terms  to  the  one  or  more  proxies  to  be 
revoked,  and  any  other  outstanding  proxies  are  not  affected. 


CHAPTER    LXXIV 

MOTIONS  AND   RESOLUTIONS 

In  the  proceedings  of  corporate  meetings,  whether  of 
stockholders  or  directors,  anything  obviously  proper  and  of 
no  great  importance  may  be  merely  directed  by  the  president, 
and,  in  the  absence  of  objection,  this  is  held  to  be  the  action 
of  the  meeting.  Matters  of  more  importance  are  sometimes 
acted  upon  in  this  same  way,  but  usually,  and  preferably, 
action  is  taken  by  means  of  either  a  motion  or  a  resolution. 

There  is  no  distinct  line  of  demarcation  between  these 
two.  They  differ  as  to  form  but  both  are  expressions  of 
the  decisions  of  the  meeting  and  are  of  the  same  legal  force. 
The  motion  is  the  simpler  in  form,  and,  though  there  is 
no  well-established  rule,  is  usually  employed  for  matters  of 
minor  importance;  while  resolutions,  which  are  formal  and 
usually  go  further  into  their  subject  matter,  are  employed 
for  such  important  corporate  actions  as  require  a  more  com- 
plete statement  and  record. 

Motions 

Motions  are  not  as  a  rule  submitted  in  writing.  The 
secretary  must  therefore  exercise  every  care  to  get  the  sense 
of  what  is  intended.  If  he  is  in  doubt  in  any  case  as  to 
whether  he  has  understood  the  motion,  or  if  its  subject  matter 
is  of  unusual  importance,  or  if  it  is  desirable  that  the  exact 
wording  be  preserved,  the  presiding  officer  should  request 
the  maker  of  the  motion  to  repeat  it,  or,  better,  to  reduce  it 
to  writing.    When  this  is  done,  the  motion  is  turned  over  to 

656 


MOTIONS   AND    RESOLUTIONS 


657 


the  secretary,  and,  if  carried,  is  incorporated  in  his  minutes 
in  the  exact  form  submitted. 

The  following  forms  show  motions  as  they  appear  in 
the  secretary's  minutes.  The  form  is  the  same  for  either 
stockholders'  or  directors'  minutes. 

Form  77.    Motion  to  Receive  President's  Report 

On  motion  duly  seconded  and  unanimously  carried,  the  President's 
report  as  read  was  duly  received  and  filed. 


Form  78.     Motion  Instructing  Secretary  to  Cast  Vote 

There  being  no  other  nominations,  the  Secretary  was  instructed  by 
motion  unanimously  carried,  to  cast  the  single  ballot  of  the  meeting  for 
the  five  candidates  for  Directors  already  named. 


Form  79.     Motion    Instructing    Secretary    to    Cast    Vote 
Formal 


On  motion  unanimously  carried,  the  Secretary  was  instructed  to  cast 
the  single  ballot  of  the  meeting  as  follows : 

For  President John  H.  McNeil 

"     Vice-President Samuel  French 

"     Secretary Harry  McGill 

"    Treasurer  Joseph  F.  Macklin 


An  amendment  to  the  by-laws  is  usually  acted  upon  by 
means  of  a  resolution.  In  the  following  instance,  as  the 
amendment  is  of  minor  importance,  it  is  decided  by  motion. 

Form  80.    Motion  to  Amend  By-Laws 

By  motion  unanimously  carried,  Section  i  of  Article  II  of  the  By- 
Laws  was  amended  by  changing  the  hour  for  the  assembling  of  the 
annual  meeting  of  the  Company  from  12  o'clock  noon  to  3  o'clock  p.m. 


658  FORMS  AND  PRECEDENTS 

Form  81.    Motion  to  Pay  Bills 

— — ———_______—____—__________—.« 

Upon  motion  duly  seconded  and  unanimously  carried,  the  Treasurer 
was  instructed  to  pay  the  account  of  the  Meyer  Contracting  Company  for 
One  Hundred  and  Thirty-Five  Dollars,  due  for  repairs  on  roof  of  the 
Franklin  Mill  as  per  statement  submitted. 

Usually  the  secretary  uses  his  discretion  as  to  recording 
the  names  of  the  parties  making  and  seconding  motions.  They 
are  not  essential  in  the  case  of  routine  motions,  motions  cov- 
ering matters  of  minor  importance,  or  motions  unanimously 
carried.  Under  other  circumstances  the  name  of  the  party 
making  and  also  the  party  seconding  a  motion  should  be 
recorded.  The  vote  on  important  motions  when  there  is 
opposition,  is  sometimes  recorded  as  well. 

Form  82.    Motion  to  Employ  General  Manager 

— _ __ _— ___ _________________  4 

Mr.  Henry  Sheldon  moved  that  James  J.  McLain  be  employed  as 
General  Manager  of  the  Company  for  a  term  of  two  years  from  date,  at 
the  annual  salary  of  Fifteen  Hundred  Dollars  payable  in  monthly  instal- 
ments. The  motion  was  seconded  by  Mr.  Charles  H.  Corbett  and  car- 
ried; Messrs.  Sheldon,  McLemore,  Corbett,  and  Johnson  voting  in  the 
affirmative,  and  Messrs.  Franklin,  Hereford,  and  Trask  voting  in  the  nega- 
tive. 


A  motion  in  writing  should  appear  on  the  minutes  in 
the  exact  form  submitted,  as  in  the  following  example,  and 
should  be  introduced  by  an  explanatory  statement,  as  "The 
following  motion  offered  by  Mr.  Wilson  was  duly  seconded 
and  carried  by  unanimous  vote." 

Form  83.    Motion  to  Appoint  an  Investigating  Committee 

Moved,  that  the  President  be  authorized  and  directed  to  appoint  a 
committee  consisting  of  three  directors  of  this  Company,  to  investigate 
the  books  and  accounts  of  the  Treasurer  for  the  past  three  years,  such 
committee  to  have  full  access  to  the  Company's  financial  records  and  to 
have  authority  to  employ  an  Auditor  to  conduct  the  technical  work  of 
their  examination,  the  compensation  of  said  Auditor  not  to  exceed  the 
sum  of  Three  Hundred  Dollars. 


MOTIONS   AND    RESOLUTIONS  659 

Resolutions 

Resolutions  should  be  submitted  in  writing.  They  are 
entered  in  the  minutes  prefaced  with  such  explanatory  re- 
marks as  the  conditions  require  or  the  secretary  thinks  de- 
sirable, as  "Upon  motion  duly  made  and  seconded  the  follow- 
ing resolution  was  unanimously  adopted,"  or  "The  following 
resolution  was  presented  by  Mr.  Cassellton,  seconded  by  Mr. 
Edwards  and  adopted,  Messrs.  Cassellton,  Edwards,  Brice, 
and  McNeil  voting  in  the  affirmative,  and  Messrs.  Mack  and 
Adams  voting  in  the  negative."  A  preamble  is  always  ad- 
missible but,  if  the  subject  matter  of  a  resolution  is  simple,  is 
not  necessary. 

There  is  no  difference  in  form  between  a  resolution 
adopted  by  the  stockholders  and  one  adopted  by  the  directors. 

Form  84.    Stockholders'  Resolution  for  Sale  of  Entire  Assets 

Whereas,  William  F.  Gaynor  and  James  G.  Reilly  as  Trustees  before 
organization  for  the  New  Hampshire  Granite  Company,  have  made  a 
proposition  to  purchase  the  entire  plant  and  business  of  this  Company  as 
a  going  concern,  including  all  assets  and  liabilities,  save  cash  in  bank  and 
on  hand,  for  Ten  Thousand  Dollars  ($10,000)  in  cash  and  Forty  Thou- 
sand Dollars  ($40,000)  par  value  of  the  stock  of  said  New  Hampshire 
Granite  Company: 

Now,  Therefore,  Be  It  Resolved,  That  the  said  proposition  be  hereby 
approved,  and  that  the  Directors  of  this  Company  be  and  hereby  are  fully 
authorized,  instructed,  and  empowered  to  accept  the  said  proposition  for 
the  sale  of  its  entire  property  and  business,  and  to  do  all  things  necessary 
to  carry  such  acceptance  into  effect  according  to  the  terms  of  said  proposi- 
tion. 

(For  corresponding  directors'  resolution,  see  Form  102.) 

Form  85.     Stockholders*  Resolution  Authorizing  Consolida- 
tion 


Whereas,  A  consolidation  of  the  Midvale  Foundry  Company  and  the 
Midvale  Steel  Company  under  the  name  of  the  New  Jersey  Foundry 
Company,  has  been  proposed,  on  terms  and  conditions  set  forth  in  an 
agreement  entered  into  on  the  17th  day  of  November,  1917,  between  tb^ 


66o  FORMS   AND   PRECEDENTS 

Directors  of  said  corporations  and  heretofore  submitted  to  the  stockholders 
of  this  Company;  and 

Whereas,  Said  proposed  consolidation  meets  with  the  approval  of  the 
stockholders  of  this  corporation: 

Now,  Therefore,  Be  It  Resolved,  That  the  Board  of  Directors  of 
this  Company  be  and  hereby  is  fully  authorized,  empowered,  and  instructed 
to  take  all  such  steps  as  may  be  necessary  or  desirable  to  carry  said  con- 
solidation into  effect  in  accordance  with  the  terms  of  said  agreement 
between  the  Directors  of  the  two  aforementioned  corporations. 


Form  86.     Stockholders'  Resolution  to  Amend  By-Laws 

Whereas,  Section  4  of  Article  IV  of  the  By-laws  of  this  Company 
reads  and  provides  in  part  as  follows : 

"The  Treasurer  shall  have  the  custody  of  all  moneys  and  securi- 
ties of  the  Company  and  shall  keep  regular  books  of  account  and 
balance  the  same  each  month." 
And  Whereas,  It  seems  to  the  stockholders  of  the  Company  that  the 
interest   of   the    Company   will    be   better    conserved    if    its    moneys    and 
securities  are  placed  in  the  custody  of  its  President : 

Now,  Therefore,  Be  It  Resolved,  That  said  Section  4  of  Article  IV 
of  said  By-laws  be  and  hereby  is  amended  as  to  the  part  above  set  forth 
to  read  and  provide  as  follows : 

"The  Treasurer  shall  keep  regular  books  of  account  and  balance 
the  same  each  month." 
and  that  Section  2  of  Article  IV  of  said  By-laws  be  amended  to  read  and 
provide  as  follows : 

"The  President  shall  preside  at  all  meetings  of  stockholders  and 
directors ;  shall  have  general  supervision  of  the  affairs  of  the  Com- 
pany ;  shall  have  the  custody  of  all  its  moneys  and  securities ;  shall 
sign  or  countersign,  etc." 


The  following  is  a  simple  form  of  resolution  authorizing 
the  treasurer  to  open  a  bank  account.  It  should  be  certified 
before  submission  to  the  bank.    (See  Form  170.) 

Form  87.    Directors'  Resolution  to  Open  Bank  Account 

Resolved,  That  the  Treasurer  be  and  hereby  is  authorized  and  in- 
structed to  open  an  account  for  the  Company  with  the  Seaboard  National 
Bank  of  New  York  City  and  to  deposit  therein  all  funds  of  the  Com- 
pany coming  into  his  possession,  such  account  to  be  in  the  name  of  the 
Company  and  funds  deposited  therein  to  be  withdrawn  only  by  check 
signed  by  the  Treasurer  and  countersigned  by  the  President. 


In  some  cases  the  designated  bank  requires  a  certified 


MOTIONS   AND   RESOLUTIONS  66l 

transcript  of  any  by-laws  giving  the  duties  and  powers  of 
the  officers  in  relation  to  the  funds.  Such  by-laws  may  be 
certified  separately  (see  Form  175),  or  may  be  included  in  the 
resolution,  as  in  the  following  example. 

Form  88.     Directors'  Resolution  Designating  Depositary 

Whereas,  Section  3,  Article  VII  of  the  By-laws  of  the  Standard 
Milling  Company  is  as  follows : 

"The  Moneys  of  the  Company  shall  be  deposited  in  the  name  of 
the  Company  in  such  bank  or  banks  as  the  Board  of  Directors  shall 
designate,   and  shall  be  drawn  out  only  by  checks   signed  by  the 
Treasurer   and    countersigned   by   the    President,    unless    otherwise 
provided  by  resolution  of  the  Board." 
Now,  Therefore,  In  pursuance  of  said  By-law,  the  Board  of  Directors 
of  the  Standard  Milling  Company  hereby  designates  the  Sherman  Trust 
Company  of  New  York  City  as  a  depositary  of  this  Company,  and  author- 
izes  and   instructs   the   Treasurer   to   open   an   account   with   said    Trust 
Company  in  the  name  of  the  Company,  and  to  deposit  therein  all  funds  of 
the  Company  coming  into  his  custody,  save  as  may  be  otherwise  directed 
by  the  Board,  said  funds  to  be  withdrawn  only  by  check  signed  by  the 
Treasurer  and  countersigned  by  the  President. 

(For  certification  of  above  resolution,  see  Form  171.) 

In  many  cases  the  banks  have  their  own  forms  of  reso- 
lution for  designation  of  the  corporate  depositary,  which 
they  supply  on  request  and  which  they  naturally  prefer  should 
be  used.  As  a  rule  these  forms  are  good,  though  occasionally 
the  latitude  and  power  they  confer  upon  the  officers  of  the 
corporation  are  somewhat  excessive.  If  this  is  the  case,  the 
resolution  may  be  modified  to  meet  the  requirements  of  the 
particular  corporation  while  still  preserving  its  general  form. 
The  form  of  resolution  which  follows  is  used  by  some  of  the 
large  New  York  banks. 

Form  89.    Directors'  Resolution  Designating  Bank 

Resolved,  That  the  Sherman  National  Bank  of  the  City  of  New  York 
be  and  the  same  is  hereby  designated  as  the  depositary  of  the  funds  of 
t^^e  American  Textile  Company,  and  that  an  account  be  opened  with  such 
Bank  in  the  name  of  said  Company,  and  that  George  H.  Wahrman,  the 


662  FORMS    AND   PRECEDENTS 

Treasurer  of  said  Company,  so  long  as  he  shall  be  Treasurer  thereof  is 
hereby  authorized  to  sign  or  indorse  any  instrument  for  or  on  behalf  of 
said  Company  and  have  the  same  placed  to  the  credit  of  said  account,  and 
also  from  time  to  time  to  withdraw  or  transfer  by  check  or  draft  or  other 
instrument  signed  by  him  and  countersigned  by  Henry  G.  Maxim,  Presi- 
dent of  the  said  American  Textile  Company,  or  any  successor  President 
of  said  Company,  any  amount  or  parts  thereof  which  may  from  time  to 
time  be  to  the  credit  of  said  account ;  and 

Resolved  Further,  That  the  respective  powers  and  the  authority  con- 
veyed by  this  present  resolution  shall  pass  to  any  duly  elected  and  qualified 
successor  Treasurer  or  President  of  the  said  American  Textile  Company 
without  further  action  of  this  Board,  and  as  fully  and  to  the  same  extent 
as  if  said  successor  officer  were  named  herein. 


Under  this  resolution,  if  a  new  treasurer  or  president 
is  elected,  nothing  is  necessary  save  for  the  election  and 
acceptance  of  the  new  official  to  be  certified  to  the  bank  by 
the  secretary  of  the  company.     (See  Forms  173,  174.) 

Form  90.     Directors'  Resolution  Authorizing  Issue  of  Stock 

Resolved,  That  the  President  and  Treasurer  be  and  hereby  are  author- 
ized and  directed  to  issue  certificates  of  the  full-paid  Capital  Stock  of 
this  Company  to  the  aggregate  amount  of  Ten  Thousand  Dollars  ($10,000), 
and  to  deliver  the  same  to  the  written  order  of  Robert  H.  Stuart,  Fiscal 
Agent  for  the  Company,  against  payment  into  the  treasury  of  the  Com- 
pany of  the  full  par  value  thereof. 


Form  91.     Directors'  Resolution  Authorizing  Contract 

Resolved,  That  the  President  and  Secretary  be  and  hereby  are  author- 
ized and  instructed  to  enter  into  a  contract  with  the  Wilbur  Collins 
Construction  Company  on  behalf  of  this  corporation,  for  the  erection  of  a 
power  house,  the  construction  of  said  power  house  to  be  in  accordance 
with  the  plans  and  specifications  on  file  in  the  office  of  this  corporation  and 
the  cost  thereof  not  to  exceed  Twenty-Five  Thousand  Dollars  ($25,000), 
payment  thereof  to  be  made  as  set  forth  in  the  written  proposition  hereto- 
fore submitted  to  this  corporation  by  the  said  Wilbur  Collins  Construc- 
tion Company. 


Form  92.    Directors'  Resolution  Declaring  Dividend 

Resolved,  That  the  sum  of  Ten  Thousand  Dollars   ($10,000)  be  and 
hereby  is  appropriated  and  set  aside  from  the  surplus  profits  of  this  Com- 


MOTIONS   AND    RESOLUTIONS  663 

pany  for  the  payment  of  the  regular  Two  Per  Cent  (2%)  quarterly 
dividend  upon  its  outstanding  stock,  said  dividend  to  be  due  and  payable 
on  the  20th  day  of  October,  1917,  to  stockholders  of  record  as  shown  by 
the  books  of  the  Company  at  the  close  of  business  on  the  15th  day  of 
October,  191 7. 

Resolved  Further,  That  the  Treasurer  of  this  Company  be  hereby 
authorized  and  instructed  to  give  due  notice  of  such  dividend  and  to  pay 
the  same  when  due. 


Form  93.     Directors'   Resolution   Declaring   Dividend — Pre- 
ferred Stock 

Resolved,  That  the  semiannual  dividend  of  Three  Per  cent  (3%) 
upon  the  outstanding  Preferred  Stock  of  the  Company  be  and  hereby  is 
declared  from  surplus  profits,  said  dividend  to  be  paid  on  the  loth  day  of 
October,  191 7,  and  to  be  payable  to  stockholders  who  appear  of  record  on 
the  1st  day  of  October,  191 7,  at  3  o'clock  p.  m.,  and  that  the  Treasurer  of 
this  Company  be  hereby  instructed  and  fully  authorized  to  give  due  notice 
of  such  dividend  and  to  pay  the  same  on  the  date  set  forth. 


Form  94.     Directors'  Resolution  Declaring   Dividend — Pre- 
ferred and  Common  Stock 


Whereas,  The  surplus  profits  of  this  Company  now  exceed  the  sum 
of  Ten  Thousand  Dollars  ($10,000)  required  by  the  By-laws  of  this  Com- 
pany to  be  held  as  a  reserve,  and  such  excess  is  now  available  for  pay- 
ment of  dividends: 

Now,  Therefore,  Be  It  Resolved,  That  a  dividend  of  Five  Per  Cent 
(5%)  be  and  hereby  is  declared  upon  the  outstanding  Preferred  Stock  of 
this  Company,  and  a  dividend  of  Three  Per  Cent  (3%)  on  the  outstand- 
ing Common  Stock  of  this  Company,  said  dividends  to  be  payable  from 
said  excess  surplus  profits  of  the  Company  on  the  5th  day  of  November, 
1917,  to  stockholders  appearing  of  record  at  3  o'clock  p.m.,  on  this  15th 
day  of  October,  1917;  and  that  the  Treasurer  of  this  company  be  hereby 
fully  authorized  and  instructed  to  give  proper  notice  of  said  dividends,  to 
pay  the  same  when  due,  and  to  take  all  other  necessary  steps  to  carry  out 
the  intent  of  the  present  resolution. 


Form  95.     Directors'  Resolution  Appointing  Managing  Di- 
rector 


Resolved,  That  Mr,  William  S.  Weston  be  hereby  appointed  Manag- 
ing Director  of  this  Company  and  be  given  the  general  supervision  and 
management  of  the  Company's  affairs  and  business,  with  such  other  powers 
and  duties  as  the  Board  of  Directors  may  from  time  to  time  confer  upon 


664  FORMS   AND   PRECEDENTS 

him;  the  annual  salary  of  said  Managing  Director  to  be  Twenty-Four 
Hundred  Dollars  ($2400),  payable  in  monthly  instalments  of  Two  Hun- 
dred Dollars  ($200)  each. 


Form  96.     Directors'  Resolution  Calling  Special  Meeting  of 
Stockholders 


Whereas,  The  authorized  Capital  Stock  of  this  corporation  is  One 
Hundred  Thousand  Dollars  ($100,000)  divided  into  One  Thousand  (1,000) 
Shares  of  Common  Stock  of  the  par  value  of  One  Hundred  Dollars 
($100)  each,  of  which  Five  Hundred  (500)  Shares  are  issued  and  Five 
Hundred  (500)  Shares  are  unissued;  and 

Whereas,  It  is  deemed  advisable  by  this  Board  that  said  Capital 
Stock  shall  be  so  classified  and  divided  into  Common  and  Preferred  Stock 
that  the  said  Five  Hundred  (500)  Shares  of  outstanding  stock  shall  be 
and  remain  Common  Stock,  but  that  the  said  Five  Hundred  (500)  Shares 
of  unissued  stock  shall  become  and  be  non-voting  Preferred  Stock, 
entitled  to  receive  a  cumulative,  preferred  dividend  of  Six  Per  Cent  (6%) 
per  annum  and  redeemable  at  its  par  value  at  the  option  of  the  Company 
at  any  time  after  ten  years  from  the  date  of  its  issue,  and  upon  the 
liquidation  of  the  Company  to  be  redeemed  if  outstanding,  at  its  full  face 
value  from  the  assets  before  any  payment  is  made  upon  the  Common 
Stock  but  not  to  participate  further  in  said  assets : 

Now,  Therefore,  Be  It  Resolved,  That  a  special  meeting  of  the  stock- 
holders of  this  Company  be  and  hereby  is  called  to  meet  in  the  office  of 
the  Company  on  the  loth  day  of  October,  1917,  at  10  o'clock  in  the  fore- 
noon, for  the  purpose  of  considering  and  acting  upon  the  proposed  classi- 
fication of  the  stock  of  this  Company  as  afore  set  forth,  and  that  the 
Secretary  of  the  Company  be  hereby  authorized  and  instructed  to  send  out 
notices  of  said  meeting  as  required  by  law  and  by  the  By-laws  of  this 
Company. 


This  resolution  conforms  to  the  requirements  of  the  New- 
York  laws,  classification  of  the  company's  stock  requiring 
authorization  by  the  stockholders. 

Form  97.    Directors'  Resolution  to  Sell  Bonds 

Resolved,  That  Howell  &  Wilkins  of  New  York  City  be  and  hereby 
are  authorized  and  empowered  to  sell  bonds  of  this  Company  to  the 
aggregate  face  value  of  One  Hundred  Thousand  Dollars  ($100,000),  and 
to  deduct  from  the  price  received  therefor  a  commission  of  Two  Per 
Cent  (2%)  provided,  however,  that  the  net  price  received  by  this  Com- 
pany for  each  One  Thousand  Dollar  ($1,000)  Bond  shall  not  be  less  than 
Nine  Hundred  and  Fifty  Dollars  ($950)  ;  and 

Resolved,  Further,  That  the  Treasurer  of  this  Company  be  and  here- 


MOTIONS   AND   RESOLUTIONS  665 

by  is  authorized  and  instructed  to  deliver  said  bonds  in  whole  or  in  part 
on  the  written  order  of  the  said  Howell  &  Wilkins.  and  to  receive  and 
receipt  for  all  amounts  paid  by  them  into  the  treasury  of  the  Company  on 
account  of  sales  of  said  bonds. 


Form  98.     Directors'  Resolution  to  Purchase  Property 
>.__. _ _ _ _ _ ____ 

Resolved,  That  the  President  and  Treasurer  of  the  Company  be  and 
hereby  are  authorized  and  instructed  to  consummate  the  purchase  of  the 
West  Valley  Marl  Beds  in  accordance  with  the  terms  of  the  option  under 
which  said  Beds  are  now  held,  and  that  they  be  further  authorized  and 
empowered  to  do  all  such  things  for  and  on  behalf  of  the  company  and 
in  its  name  as  may  be  necessary  thereto. 


Form  99.    Directors'  Resolution  for  Settlement  of  Claim 

Resolved,  That  the  President  and  Secretary  of  this  Company,  acting 
with  its  Counsel,  be  hereby  instructed  to  use  their  best  efforts  to  arrive 
at  some  favorable  settlement  with  the  employees  of  this  Company  in- 
jured in  the  recent  accident,  and  that  said  officers  be  hereby  fully  author- 
ized and  empowered  to  accept  any  settlement  deemed  by  them  satisfac- 
tory and  approved  by  the  Counsel  of  the  Company,  provided  that  the 
total  payments  involved  therein  shall  not  exceed  the  sum  of  Twenty-five 
Hundred  Dollars  ($2500). 


Form  100.     Directors'  Resolution  Ratifying  Sale  of  Property 

Whereas,  The  President  and  Treasurer  of  this  Company  have  here- 
tofore on  the  2ist  day  of  July,  1917,  sold  and  disposed  of  the  machinery, 
tools,  and  other  apparatus  belonging  to  this  Company  and  then  in  the 
premises  at  235  Main  St.,  Newark,  New  Jersey,  the  amount  realized  from 
such  sale — Two  Thousand,  Seven  Hundred  and  Fifty  Dollars  ($2,750) — 
having  been  duly  paid  into  the  treasury  of  this  Company ;  and 

Whereas,  Said  sale  was  made  without  authorization  from  this  Board, 
owing  to  the  absence  from  the  city  of  a  majority  of  its  members ;  and 

Whereas,  In  the  opinion  of  the  Board  such  sale  was  for  the  best  inter- 
ests of  the  Company,  and  the  action  of  said  officers  in  consummating  the 
same  therefore  meets  with  its  approval : 

Now,  Therefore,  Be  It  Resolved,  That  the  action  of  the  said  officers 
of  this  Company  in  selling  and  disposing  of  the  aforementioned  property 
as  aforesaid  be  and  hereby  is  ratified,  approved,  and  confirmed,  and  that 
said  action  be  accepted  as  the  action  of  the  Company,  and  the  assignments 
thereof  be  ratified,  confirmed,  and  accepted  as  the  duly  executed  assign- 
ments of  this  Company,  of  the  same  force  and  effect  as  if  entered  into 
under  direct  authorization  of  this  Board. 


666  FORMS   AND   PRECEDENTS 

Form  loi.    Directors'  Resolution  Removing  Officer 

Whereas,  In  the  opinion  of  this  Board  the  interests  of  the  Company 
do  not  permit  the  continuance,  in  his  present  official  position,  of  its  Presi- 
dent, John  Farraday;  and 

Whereas,  The  said  John  Farraday  has  refused  to  resign  although 
requested  thereto  by  members  of  this  Board  duly  authorized  thereunto: 

Now,  Therefore,  Be  It  Resolved,  That  exercising  its  statutory  power 
the  Board  of  Directors  of  the  Manly  Electric  Corporation  does  hereby 
remove  the  said  John  Farraday  from  his  official  position  as  President 
of  this  Company,  and  declares  said  office  vacant  and  said  John  Farraday 
no  longer  authorized  to  act  on  its  behalf  in  any  capacity;  and 

Resolved  Further,  That  the  Secretary  of  the  Company  be  and  here- 
by is  instructed  to  notify  at  once  the  said  John  Farraday  of  his  removal 
from  the  presidency  of  this  Company,  and  to  give  such  other  proper  and 
public  notice  of  said  removal  as  may  in  his  judgment  be  necessary  to 
protect  the  interests  of  the  Company. 


♦      Form  102.     Directors'  Resolution  for  Sale  of  Entire  Assets 

Whereas,  A  proposition  has  been  made  by  the  Trustees  of  the  New 
Hampshire  Granite  Company  to  purchase  the  entire  property  and  busi- 
ness of  this  Company  for  Ten  Thousand  Dollars  ($10,000)  in  cash  and 
Forty  Thousand  Dollars  ($40,000)  in  stock  of  the  said  proposed  corpora- 
tion as  set  forth  in  their  written  proposition  heretofore  ordered  to  be 
spread  upon  the  minutes  of  this  meeting ;  and 

Whereas,  The  stockholders  of  this  Company  in  duly  assembled  meet- 
ing at  which  all  the  voting  stock  of  the  Company  was  represented  in  per- 
son or  by  proxy,  did  by  resolution  unanimously  carried,  approve  said  sale 
and  authorize  and  instruct  this  Board  to  accept  said  proposition: 

Now,  Therefore,  Be  It  Resolved,  That  the  said  proposition  be  and 
the  same  is  hereby  accepted  by  this  (Company  on  the  terms  set  forth  in 
said  written  proposition  as  entered  upon  the  minutes  of  this  meeting,  and 
the  President  and  Secretary  of  the  Company  are  hereby  empowered  and 
instructed  to  execute  all  proper  instruments  to  carry  such  acceptance  into 
effect,  and  on  behalf  of  this  Company  to  receive  the  said  Ten  Thousand 
Dollars  ($10,000)  in  cash  and  Forty  Thousand  Dollars  ($40,000)  in  stock 
of  the  said  New  Hampshire  Granite  Company,  and  to  do  all  such  other 
things  in  connection  with  such  sale  and  the  said  transfer  of  property  as 
may  be  found  necessary  for  its  proper  consummation. 

(For  corresponding  stockholders'  resolution,  see  Form  84.) 


CHAPTER    LXXV 

INCIDENTAL  FORMS 

The  secretary  will  find  a  list  of  stockholders,  giving  the 
stock  held  by  each  and  arranged  as  in  the  following  form, 
of  much  convenience  for  use  at  stockholders'  meetings.  This 
does  not  take  the  place  of  the  statutory  list  required  in  some 
states,  but  is  merely  for  use  in  calling  the  roll  or  noting  those 
present  and  absent,  and  preserving  in  compact  form  a  record 
of  the  results. 

Form  103.    Secretary's  List  of  Stockholders 

INDUSTRIAL  SUPPLY  COMPANY 


List  of  Stockholders 
October  10,  1917 


Name 

Shares 
Owned 

Not 
Present 

Present 

IN 

Person 

Present 
Proxy 

Name  of  Proxy 

Adrian,  Henry  F. 

100 

100 

Ahrens,  Sam'l  T. 

50 

50 

Allison,  Daniel  H. 

75 

75 

George  T.  Foster 

Barry,  John  J. 

85 

85 

Belmont,  Maurice 

25 

25 

Colville,  Frederick 

100 

, . 

100 

Daniels,  E.  F. 

100 

50 

50 

Harry  H.  Winters 

Greenwald,  Martin 

80 

80 

William  Greenwald 

Hughes,  Cora  H. 

150 

150 

Lawrence,  Edw. 

25 

25 

McCabe,  Albert 

50 

50 

W.  B.  Wells 

Mullins,  Chas.  D. 

35 

35 

Price,  Harvey 

200 

200 

Rollins,  James  H. 

50 

50 

Henry  Siebert 

Shanley,  J.  J. 

25 

25 

Sherman,  B.  L. 

150 

150 

Wiley,  Edwin  H. 

100 

100 

Harry  T.  French 

Zimmer,  Henry  T. 

100 

.. 

TOO 

•• 

1,500 

ICO 

0/<'^ 

/0-; 

667 


668  FORMS   AND   PRECEDENTS 

The  list  as  shown  is  after  the  secretary's  notations  have 
been  made.  The  data  of  the  first  two  columns  are  taken  from 
the  stock  books  of  the  company  before  the  time  of  the  meet- 
ing. If  a  stockholder  is  not  represented  at  the  meeting,  a 
check  mark,  or,  better,  the  number  of  his  shares,  is  entered 
in  the  third  column.  If  present  in  person,  the  number  of 
shares  owned  is  entered  in  the  fourth  column.  If  represented 
by  a  proxy,  the  number  of  his  shares  is  entered  in  the  fifth 
column,  and  the  name  of  the  person  holding  the  proxy  in  the 
last  column. 

It  will  be  noted  that  in  the  foregoing  list,  a  portion  of 
the  holding  of  one  stockholder  is  entered  in  the  column  "Not 
Present"  and  a  portion  is  entered  in  the  column  *Tresent  by 
Proxy."  This  shows  that  the  party  gave  a  proxy  for  a  por- 
tion of  his  stock  and  that  the  person  to  whom  this  was  given 
was  present,  while  the  remaining  stock  was  not  represented. 

The  list,  when  the  secretary's  notations  are  finished,  gives 
a  complete  record  of  the  attendance  at  the  meeting.  The 
combined  footing  of  columns  four  and  five  give  the  number  of 
shares  represented,  which  added  to  the  footing  of  column 
three  will  give  the  total  stock  outstanding. 

At  the  annual  meeting  routine  work  is  apt  to  be  gone 
through  with  some  rapidity  and  the  secretary  does  not  always 
have  time  for  its  proper  record  unless  provision  is  made  there- 
for prior  to  the  meeting.  For  this  purpose  outline  minutes  are 
frequently  prepared. 

These  outline  minutes  are  best  prepared  on  sheets  of  loose 
paper  with  ample  room  between  the  items  for  the  interpola- 
tion of  any  comments  or  additional  matter.  They  are  merely 
intended  to  afford  memoranda  from  which  the  secretary  will 
later  write  out  the  complete  minutes.  If,  through  unexpected 
changes  or  omissions  any  portion  of  the  outline  minutes  can- 
not be  used,  the  secretary  has  merely  to  draw  his  pencil 
through  the  part  superseded. 


INCIDENTAL   FORMS  669 

Form  104.     Outline  Minutes  for  Annual  Meeting 

INDUSTRIAL  SUPPLY  COMPANY 
OF  New  York 


Minutes  of  Annual  Meeting 
Held  October  10,  191 7 


Meeting  called  to  order  at a.m.,  by 

who  presided  over  meeting.     Officiating  Secretary 

Present  at  meeting  in  person Shares.     By 

Proxy Shares.    Total Shares.    (See  Form 

103  for  this  data.)     Necessary  for  quorum,  751  Shares. 

Copy  of  notice  of  meeting  submitted  with  secretary's  certificate  of  due 
service  attached.    Ordered  spread  upon  minutes. 

Minutes  of  previous  meeting  read  and 

Annual  Reports: 
President's 
Treasurer's 
Special 

Election  of  Directors.    Nominated : 


Inspectors  of  Election: 


Results:     (To  be  taken  front  inspector's  certificate  of  election;  see 
Forms  33,  106.) 
New  business : 


In  some  states  the  statutes  require  that  the  election  of 
directors  must  be  conducted  by  inspectors.  Elsewhere  they  or 
similar  officers  designated  as  tellers,  are  employed  as  a  matter 
of  convenience. 

Usually  inspectors  are  not  sworn,  but  in  some  states  this 
is  required  by  the  statutes  or  is  a  matter  of  custom.  The 
oaths  and  certificates  of  inspectors  of  election  in  the  general 
form  employed  in  New  York  follow.  They  may  be  easily 
modified  to  meet  any  statutory  requirements  of  other  states. 
(For  New  Jersey  form  see  Form  33.) 


'670  FORMS   AND   PRECEDENTS 

Form  105.    Oath  of  Inspectors  of  Election — New  York 

Oath  of  Inspectors  of  Election 


State  of  New  York       | 
County  of   New  York  j 

We,  the  undersigned,  duly  appointed  to  act  as  Inspectors  of  Election 
at  the  annual  meeting  of  the  stockholders  of  the  Hudson  River  Naviga- 
tion Company,  to  be  held  in  the  office  of  the  Company,  No.  ^2  Broadway, 
New  York,  on  the  2nd  day  of  November,  1917,  being  severally  duly  sworn, 
depose  and  say  and  each  for  himself  deposes  and  says  that  he  will  faith- 
fully execute  the  duties  of  Inspector  of  Election  at  such  meeting  with 
strict  impartiality  and  according  to  the  best  of  his  ability. 

Frank  H.  Astor 
David  J.  McKane 
Severally  sworn  to  before  me  this 

2nd  day  of  November,  191 7. 

Allen  T.  Bauvelt, 
C  notarial  )  Notary  Public  in  and  for 

\      seal     ]  New  York  County 


The  oath  of  the  inspectors  of  election  and  their  certificate 
as  to  the  election  results — as  given  in  the  form  which  fol- 
lows— arc  usually  written,  as  a  matter  of  convenience,  on  one 
sheet  of  paper,  the  oath  preceding  the  certificate. 

Form  106.     Certificate  of  Inspectors  of  Election — New  York 

Certificate  of  Inspectors  of  Election 


We,  the  undersigned  duly  appointed  Inspectors  of  Election  of  the 
Hudson  River  Navigation  Company  of  New  York  City,  New  York,  do 
hereby  certify  that  at  the  regular  annual  meeting  of  said  corporation,  held 
in  the  office  of  the  Company,  No.  72  Broadway,  New  York  City,  on  the 
2nd  day  of  November,  1917,  a  quorum  being  present,  we  being  first  duly 
sworn  by  oath  hereunto  annexed,  did  conduct  the  election  for  directors  of 
said  corporation  and  that  the  result  of  the  vote  taken  thereat  was  the 
election  by  the  plurality  vote  set  opposite  their  respective  names,  of  the 
following  directors : 

names  votes  received    . 

Charles  E.  Shepherd 2,135 

Frank  J.  Piatt 2,000 

Harry  P.  Tucker i,97o 

Edward  T.  Bowles 1,875 


INCIDENTAL   FORMS  671 

Henry  P.  Moody 1,825 

George  McDonald 1,825 

Albert  T.  Calkins     1,800 

In  Testimony  Whereof,  we  have  executed  this  certificate  this 
2nd  day  of  November,  1917. 

Frank  H.  Astor 
David  J.  McKane 


Farm  107.    Acknowledgment  of  Inspectors'  Certificate 

State   of   New   York  )  . 

County  of  New  York) 

On  this  2nd  day  of  November,  191 7,  before  me  personally  came  Frank 
H.  Astor  and  David  J.  McKane,  to  me  known  to  be  the  persons  de- 
scribed in  and  who  executed  the  foregoing  certificate  and  severally  ac- 
knowledged that  they  executed  the  same  for  the  use  and  purposes  therein 
set  forth. 

I  notarial  \  Allen  T.  Bauvelt, 

\     SEAL      )  Notary  Public  in  and  for 

New  York  County 

In  New  York  the  inspectors'  oath  and  certificate  must 
be  filed  in  the  county  clerk's  office.  In  New  Jersey  they  are 
merely  handed  the  secretary  to  be  filed  among  the  company's 
archives. 

When  not  required  by  statute,  the  formality  of  swear- 
ing inspectors  is  usually  dispensed  with.  An  inspectors'  report 
is,  however,  a-  convenient  method  of  entering  the  results  of 
the  election  upon  the  minutes,  and  the  written  report  is  there- 
fore desirable.  Its  form  under  such  circumstances  might  be 
as  follows: 

Form  108.     Certificate  of  Inspectors  of  Election — General 

Certificate  of  Inspectors  of  Election 


We,  the  undersigned,  duly  appointed  Inspectors  of  Election  of  the 
Hamilton  Machine  Company  of  Philadelphia,  Pennsylvania,  to  conduct 
the  election  of  directors  of  said  Company  held  this  14th  day  of  Novem- 


672  .  FORMS    AND   PRECEDENTS 

ber,  1917,  at  3  o'clock  p.m.,  in  the  office  of  the  Company,  No.  15  Chestnut 
St.,  Philadelphia,  Pa.,  do  hereby  certify  and  report  that  said  election 
was  conducted  by  us  in  due  and  proper  form,  and  that  the  result  of  the 
vote  taken  thereat  by  ballot  was  the  election  by  the  plurality  vote  set 
opposite  their  respective  names  of  the  following  directors : 

NAMES  VOTES    RECEIVED 

E.  L.  Lambert 200 

John  C.  Robinson 200 

Walter  S.  Hall 200 

William  H.  Sloane 200 

Alvah  H.  Marshall 200 

In  Witness  Whereof,  we  hereunto  affix  our  respective  sig- 
natures this  14th  day  of  November,  191 7. 

Arthur  T.  Newman 
George  Haywood 


A  simple  form  of  ballot  for  the  annual  meeting  is  as 
shown  below.  This  is  prepared  before  the  time  of  the  meet- 
ing, complete — when  the  candidates*  names  are  known  in 
advance — save  as  to  signature  and  the  number  of  shares 
voted. 

Form  109.    Ballot  at  Annual  Meeting 


MAXIM  WATCH  COMPANY 


Ballot 
Annual  Meeting,  November  5,  191 7 


I,  the  undersigned,  hereby  vote  125  shares  of  stock  for  the  following 
named  persons  to  serve  as  Directors  for  the  ensuing  year : 

John  H.  Brown  Frank  T.  Jones 

Howard  McCall  Fowler  McVeigh 


Marvin  H.  Smith 


Signature, 

Harold  McKain, 
Proxy  for  Samuel  H.  Hilton 


Where  a  more  formal  ballot  is  desired  the  following  will 
serve: 


INCIDENTAL    FORMS  673 

Form  no.    Ballot  at  Annual  Meeting — Formal 

UNITED  STATES  POTTERIES 


Ballot 
Sixteenth  Annual  Meeting,  April  20,  1917. 


The  undersigned  votes  the  number  of  shares  noted  in  the  subscription 
hereto  as  follows : 

1.  In  favor  of  approving  and  ratifying  all  purchases,  contracts,  acts, 
proceedings,  elections,  and  appointments  by  the  Board  of  Directors  or  the 
Finance  Committee,  since  the  fifteenth  annual  meeting  of  the  stockholders 
of  the  Corporation  on  April  15,  1916,  as  set  forth  in  the  minutes  of  the 
Board  of  Directors,  or  of  the  Finance  Committee,  or  in  the  Fifteenth 
Annual  Report. 

2.  For  the  following  named  persons,  as  Directors  for  the  three 
years  ending  in  1920: 

3.  For  the  firm  of  Price,  Waterhouse  &  Co.,  as  independent  audi- 
tors, to  audit  the  books  and  accounts  of  the  Corporation  at  the  close  of 
the  fiscal  year  ending  December  31,  191 7. 

Name  Number   of    Shares 

Preferred  Common 

in  person 

proxy  for 


CHAPTER    LXXVI 
MINUTES   OF  CORPORATE  MEETINGS 

The  general  form  in  which  minutes  are  kept  is  a  matter 
of  custom.  The  details  are  determined  by  the  secretary  of 
the  particular  company.  The  headings  should,  however, 
always  be  sufficiently  full  and  explicit  to  show  at  a  glance 
whether  the  meeting  is  of  stockholders  or  directors  and 
whether  it  is  a  regular,  special,  or  adjourned  meeting.  The 
date  of  the  particular  meeting,  though  always  stated  in  the 
body  of  the  minutes,  should  also  appear  in  the  heading  as  a 
matter  of  convenience. 

The  name  of  the  corporation  is  frequently  brought  in 
at  the  head  of  every  set  of  minutes.  When  this  is  not  done 
the  minute  book  itself  should  be  very  plainly  stamped  or 
marked  with  the  name  of  the  company,  which  should  also 
appear  on  the  title  page  of  the  book  and  again  at  the  top  of 
the  first  written  page  of  minutes. 

Stockholders'  Meetings 

Form  III.     Minutes  of  Annual  Meeting  of  Stockholders 

MIDVALE  FOUNDRY  COMPANY 

of 

New  Jersey 


Minutes  of  Regular  Meeting  of  Stockholders 
Held  November  2,  1917 


The  stockholders  of  the  Midvale  Foundry  Company  met  in  annual 
meeting  in  the  office  of  the  Company  at  Midvale,  New  Jersey,  at  10 
o'clock  in  the  forenoon,  November  2,  1917. 

674 


MINUTES   OF   CORPORATE   MEETINGS 


675 


The  meeting  was  called  to  order  and  presided  over  by  Mr.  Frederick 
H.  Colgate,  President  of  the  Company.  The  Secretary  of  the  Company, 
Mr.  W.  A.  Thompson,  acted  as  Secretary  of  the  meeting. 

The  Secretary  after  noting  the  stockholders  present,  reported  that 
out  of  a  total  of  5,000  shares  of  stock  outstanding  and  entitled  to  vote  at 
the  meeting,  4,900  shares  were  represented  at  the  meeting;  3,500  shares  in 
person  and  1,400  shares  by  proxies  filed  with  the  Secretary. 

The  Secretary  then  read  a  copy  of  the  notice  of  the  meeting,  with  his 
certificate  attached  showing  that  a  copy  thereof  had  been  mailed  to  each 
stockholder  of  record  on  or  before  the  17th  day  of  October,  1917.  He 
also  presented  copies  of  the  Newark  Advertiser  and  the  Jersey  City 
Journal  under  date  of  October  19  and  October  26,  containing  due  adver- 
tisement of  the  meeting.  The  proof  of  notice  as  presented  was  ordered 
received  and  filed. 

The  Secretary  produced  the  stock  and  transfer  books  of  the  Com- 
pany, together  with  an  alphabetical  list  giving  the  name,  residence,  and 
number  of  shares  of  stock  held  by  every  stockholder  entitled  to  vote  in 
the  election  of  directors.  This  list  remained  open  to  inspection  during 
the  election  of  directors  and  for  the  entire  time  of  the  meeting. 

The  minutes  of  the  preceding  annual  meeting  were  then  read  and  ap- 
proved. The  minutes  of  the  special  meeting  of  stockholders  held  Sep- 
tember 10,  1917,  were  also  read  and  approved. 

Upon  motion  duly  seconded  and  carried,  Messrs.  W.  B.  Johnson  and 
D.  L.  Boyd  were  appointed  Inspectors  of  Election,  were  duly  sworn,  and 
the  meeting  then  proceeded  to  the  election  of  directors.  The  election  was 
held  by  ballot  and  the  polls  were  opened  at  10:15  o'clock  a.m.  and  closed 
at  II  :i5  o'clock  a.m. 

The  Inspectors  thereupon  presented  their  report  in  writing  showing 
that  Frederick  H.  Colgate,  Benson  R.  Vale,  William  R.  Buchanan,  Mal- 
colm R.  Rigby,  and  Robert  H.  McCarter  had  received  a  plurality  of  all 
the  votes  cast,  and  the  said  parties  were  thereupon  declared  to  be  the 
duly  elected  directors  of  the  Company  for  the  ensuing  year  and  until  the 
election  of  their  successors. 

The  annual  report  of  the  President  was  then  presented  and  upon  re- 
quest was  read  by  him.  The  report  was  by  motion  unanimously  carried, 
ordered  received,  and  filed. 

The  Treasurer's  annual  report  was  submitted,  and,  no  objection  being 
offered,  was  ordered  received  and  filed. 

The  report  of  the  committee  appointed  at  the  special  meeting  of 
stockholders  held  September  10,  1917,  to  examine  the  accounts  of  the 
Company,  was  received,  and  by  motion  its  findings  were  approved  and 
the  report  ordered  received   and  filed. 

Upon  motion  duly  made  and  unanimously  adopted,  the  Board,  of 
Directors  were  authorized  to  secure  plans  and  estimates  for  enlarging  the 
plant  of  the  company. 

There  being  no  further  business  before  the  meeting,  motion  to 
adjourn  was  unanimously  adopted. 

Frederick  H.  Colgate,  W.  A.  Thompson, 

President  Secretary 


(See  Chapter  XXXIX,  "Annual  Meeting  of  Stockholders.") 


5^6  FORMS   AND   PRECEDENTS 

Form  112.     Minutes  of  Special  Meeting  of  Stockholders 


MIDVALE    FOUNDRY    COMPANY 

of 

New  Jersey 


Minutes  of  Special  Meeting  of  Stockholders 
Held  November   19,   1917 


The  stockholders  of  the  Midvale  Foundry  Company  assembled  In 
special  meeting  in  the  office  of  the  Company  at  Midvale,  New  Jersey,  at 
10  o'clock  in  the  forenoon  on  the  19th  day  of  November,  1917,  pursuant 
to  call  of  the  President  followed  by  due  notice  thereof  to  the  stock- 
holders. 

The  meeting  was  called  to  order  by  Mr.  Frederick  H.  Colgate,  Presi- 
dent of  the  Company;  the  Secretary  of  the  Company,  Mr.  W.  A.  Thomp- 
son, officiating  as  recording  officer. 

The  entire  capital  stock  of  the  Company  was  represented  at  the  meet- 
ing, either  in  person  or  by  proxy  filed  with  the  Secretary. 

The  Secretary  presented  the  Call  and  Notice  pursuant  to  which  the 
meeting  was  held,  with  his  certificate  that  said  notice  had  been  sent  out 
not  less  than  twenty  days  before  the  date  of  meeting.  The  Call  and 
Notice  were  ordered  spread  upon  the  Minute  Book  immediately  following 
the  minutes  of  the  meeting. 

The  President  then  stated  briefly  that  the  meeting  was  assembled  to 
consider  a  proposition  from  the  Midvale  Steel  Company  for  the  con- 
solidation of  the  two  companies  under  the  general  name  of  the  New  Jer- 
sey Foundry  Company,  the  new  company  to  have  a  capitalization  of  One 
Million,  Five  Hundred  Thousand  Dollars  ($1,500,000)  and  stock  in  both 
companies  to  be  exchanged  for  stock  of  the  new  company,  share  for 
share. 

A  discussion  of  the  proposition  disclosed  considerable  opposition 
mainly  on  the  ground  that  the  financial  conditions  of  the  Midvale  Steel 
Company  were  not  such  as  to  make  the  desired  consolidation  advanta- 
geous. 

Replying  to  this  objection,  the  President  stated  that  the  financial 
statement  of  the  Midvale  Steel  Company  as  presented  in  the  proposition 
from  that  Company,  apparently  misrepresented  its  real  condition,  and 
suggested  that  an  adjournment  of  the  meeting  be  taken  until  10  o'clock 
A.M.  on  the  following  day,  in  order  to  permit  the  officers  of  the  Midvale 
Steel   Company  to  furnish   authoritative  information  on  this  point. 

No  objection  being  offered  to  this  suggestion,  the  President  declared 
the  meeting  adjourned  to  assemble  again  in  the  office  of  the  Company  at 
10  o'clock  A.M.,  November  20,   1917. 

Frederick  H.  Colgate,  W.  A.  Thompson, 

President  Secretary 


(See  Chapter  XL,  "Special  Meetings  of  Stockholders.") 


MINUTES   OF   CORPORATE   MEETINGS  (^jy 

Form  113.    Minutes  of  Adjourned  Meeting  of  Stockholders 

MIDVALE   FOUNDRY    COMPANY 

of 

New  Jersey 


Minutes   of  Adjourned    Special   Meeting   of    Stockholders 
Held  November  20,  1917. 
(Adjourned  from  meeting  of  November  19,  1917.) 


The  stockholders  of  the  Midvale  Foundry  Company  met  in  adjourned 
meeting  in  the  office  of  the  Company  at  Midvale,  New  Jersey,  at  10 
o'clock  in  the  forenoon  on  the  20th  day  of  November,   1917. 

Mr.  Frederick  H.  Colgate  called  the  meeting  to  order  and  presided. 
Mr.  W.  A,  Thompson  acted  as  Secretary  of  the  meeting. 

The  stockholders  of  the  Company  were  all  present  in  person  or  by 
proxy. 

The  minutes  of  the  special  meeting  of  stockholders  held  on  the  pre- 
ceding day  and  from  which  the  present  meeting  was  adjourned,  were  read 
for  the  information  of  those  present. 

The  President  then  presented  and  read  to  the  meeting  a  letter  from 
the  Treasurer  of  the  Midvale  Steel  Company,  explaining  satisfactorily  the 
financial  conditions  of  that  Company. 

The  President  further  stated  that  the  proposed  consolidation  had  al- 
ready been  authorized,  on  the  terms  set  forth,  by  the  stockholders  of  the 
Midvale  Steel  Company  and  that  if  it  were  also  authorized  by  the  Mid- 
vale Foundry  Company,  the  proper  action  would  be  taken  by  the  Boards 
of  Directors  and  officials  of  the  respective  companies  to  consummate  the 
consolidation  at  the  earliest  possible  moment. 

The  following  resolution  was  then  offered  by  Mr.  Charles  H.  Curtis : 
(See  Form  83.) 

After  a  short  discussion,  Mr.  D.  V.  Jackson  moved  that  the  resolu- 
tion be  adopted.  The  motion  was  seconded  by  Mr.  Henry  B.  Vale,  and 
was  carried  by  unanimous  vote. 

There  being  no  further  business  before  the  meeting,  the  President  de- 
clared it  adjourned. 

Frederick  H.   Colgate,  W.  A.   Thompson, 

President  Secretary 


The  proposition  for  consoHdation  presented  at  the  special 
meeting  of  the  stockholders  of  the  Midvale  Foundry  Com- 
pany does  not  appear  appended  to  the  minutes  of  that  meet- 
ing as  it  would  properly  appear  in  the  minutes  of  the  directors' 
meeting  at  which  final  action  upon  it  is  taken,  and  does  not 
require  to  be  brought  into  both  minutes. 


6^8  FORMS   AND   PRECEDENTS 

Directors'  Meetings 

The  general  form  of  directors'  minutes  is  the  same  as 
for  those  of  stockholders'  meetings.  It  is,  however,  cus- 
tomary to  enter  the  names  of  those  present,  which  is  not 
usually  done  in  the  case  of  stockholders'  meetings. 

Form  114.    Minutes  of  Regular  Meeting  of  Directors 


FAIRFIELD   CEMENT   COMPANY 

of 

New  York 


Minutes  of   Regular  Meeting  of  Directors 
Held  October   14,   1917 


The  Board  of  Directors  of  the  Fairfield  Cement  Company  of  New 
York  assembled  in  regular  meeting  In  the  office  of  the  Company,  Fair- 
field, New  York,  at  3  o'clock  in  the  forenoon  on  Wednesday,  October  14, 

The  meeting  was  called  to  order  and  presided  over  by  William  A. 
Pierce,  President  of  the  Company.  Mr.  Morris  H.  Goodrich,  Secretary 
of  the  Company,  acted  as  Secretary  of  the  meeting. 

Present:  Messrs.  William  A.  Pierce,  John  H.  Pickering,  Walter  S. 
Laighton,  John  K.  Bates,  Fred  N.  Barney,  and  Morris  H.  Goodrich,  con- 
stituting a  quorum  of  the  Board. 

The  minutes  of  the  preceding  meeting  of  September  9,  1917,  and 
of  the  meetings  of  September  15  and  of  September  18  and  September 
25  adjourned  therefrom,  were  read  and  approved. 

The  President  reported  that  the  new  plant  of  the  Company  at  the 
West  Valley  marl  beds  was  progressing  rapidly  and  should  be  completed 
on  or  before  December  15.  He  also  stated  that  arrangements  had  been 
made  for  the  installation  of  the  necessary  machinery  and  for  the  general 
equipment  of  the  plant,  and  that  it  was  hoped  it  would  be  in  full  opera- 
tion before  the  close  of  the  year. 

The  President  also  reported  that  the  Deering  Construction  Company 
was  about  to  contract  for  a  large  amount  of  cement,  aggregating  nearly 
One  Hundred  Thousand  (100,000)  barrels,  with  deliveries  extending  over 
a  year,  and  that  he  felt  confident  that  if  the  Company  would  make  the 
proper  concessions  as  to  price  that  the  contract  could  be  secured,  and 
asked  that  the  Board  authorize  him  to  make  such  concessions — not  ex- 
ceeding fifteen  cents  per  barrel — as  might  be  necessary  to  secure  said 
contract. 

The  President  further  reported  that  additional  funds  amounting  to 
about  Forty  Thousand  Dollars  ($40,000)  would  be  required  for  the  com- 
pletion of  the  West  Valley  plant  not  later  than  December  15,  1917,  and 


MINUTES   OF   CORPORATE   MEETINGS 


679 


r.sked  the   Board  to  take   such  action   as   might  be  necessary  to   secure 
these  needed   funds. 

The  Treasurer  then  submitted  a  report  giving  the  receipts  and  ex- 
penditures for  the  past  month  and  showing  a  present  cash  balance  on 
hand  of  $5,525.25. 

Mr.  Arthur  Hurd,  Counsel  for  the  Company,  reported  that  his  in- 
vestigations of  the  titles  of  the  marl  beds  lying  to  the  north  of  the  Com- 
pany's West  Valley  beds  had  disclosed  some  apparent  imperfections,  and 
he  therefore  advised  the  Board  to  postpone  the  consummation  of  the 
purchase  of  these  beds  until  the  titles  were  put  in  satisfactory  shape. 

The  President's  recommendations  were  then  taken  up,  and  after  some 
discussion  the  President  was  authorized  by  motion  unanimously  carried 
to  make  such  discounts  to  the  Deering  Construction  Company — not  ex- 
ceeding fifteen  cents  per  barrel — as  might  be  necessary  to  secure  the 
contract  mentioned. 

The  matter  of  finance  for  the  West  Vallej^  plant  was  by  unanimous 
consent  deferred  until  the  next  meeting  of  the  Board. 

The  report  of  the  Company's  Counsel  in  regard  to  the  marl  beds 
north  of  the  West  Valley  beds  was  then  taken  up  for  discussion.  Mr. 
Walter  S.  Laighton  urged  that  no  lengthy  delay  should  be  permitted, 
stating  that  he  was  personally  cognizant  of  the  fact  that  other  parties 
were  desirous  of  securing  these  same  marl  beds  and  that  the  present 
option  under  which  the  beds  were  held  would  expire  in  three  weeks  from 
date  and  he  was  positive  could  not  be  renewed  at  anything  like  the  present 
option  price.  Mr,  Arthur  Hurd,  Counsel  for  the  Company,  thereupon 
stated  that  his  investigations  could  be  completed  inside  a  week,  and  on 
motion  duly  carried,  the  meeting  was  adjourned  to  assemble  again  in  the 
office  of  the  Company,  October  21,  at  3  o'clock  p.m. 

William  A.  Pierce,  Morris  H.  Goodrich, 

President  Secretary 


(See  Chapter  XLI,  "Meetings  of  Directors.") 
Form  115.    Minutes  of  Adjourned  Meeting  of  Directors 

FAIRFIELD   CEMENT    COMPANY 

of 

New  York 


Minutes  of  Adjourned  Meeting  of  Directors 

Held  October  21,  1917 

(Adjourned  from  regular  meeting  of  October  14,  1917.) 


The  Board  of  Directors  of  the  Fairfield  Cement  Company  met  in 
adjourned  meeting  in  the  office  of  the  Company  at  Fairfield,  New  York, 
at  3  o'clock  in  the  afternoon,  Tuesday,  October  21,  1917. 

The  meeting  was  called  to  order  and  presided  over  by  the  Presi- 
dent, Mr.  William  A.  Pierce.  The  Secretary  of  the  Company,  Mr.  Morris 
H.  Goodrich,  acted  as  Secretary  of  the  meeting. 


58o  FORMS   AND   PRECEDENTS 

There  were  present  Messrs.  William  A,  Pierce,  John  H.  Pickering. 
Walter  S.  Laighton,  John  K.  Bates,  Fred  N.  Barney,  Silas  H.  Harvey, 
and  Morris  H.   Goodrich,  constituting  a  quorum  of  the  Board. 

The  minutes  of  the  board  meeting  of  October  14,  1917,  were  read 
for  the  information  of  those  present. 

After  the  reading  of  the  minutes,  Mr.  Arthur  Hurd,  Counsel  for  the 
Company,  reported  that  his  investigation  of  the  titles  of  the  marl  beds 
lying  north  of  the  West  Valley  beds  had  been  completed,  that  the  defects 
to  which  he  had  referred  in  his  previous  repbrt  had  been  overcome,  that 
the  titles  were  now  in  good  shape,  and  that  the  purchase  of  the  beds 
could  be  safely  consummated. 

Thereupon  on  motion  of  Mr.  John  H.  Pickering,  seconded  by  Mr. 
Walter  S.  Laighton  and  carried  by  unanimous  vote,  the  following  reso- 
lution was  adopted: 

(See  Form  gS) 

There  being  no  further  business  before  the  meeting,  it  was  ad- 
journed. 

William  A.  Pierce,  Morris  H.  Goodrich, 

President  Secretary 


Form  116.    Minutes  of  Special  Meeting  of  Directors 

FAIRFIELD    CEMENT    COMPANY 

of 

New  York 


Minutes  of  Special  Meeting  of  Directors 
Held  December  7,    1917 


The  Board  of  Directors  of  the  Fairfield  Cement  Company  of  New 
York  met  in  special  meeting  pursuant  to  due  call  and  waiver,  in  the  office 
of  the  Company  at  Fairfield,  New  York,  at  3  o'clock  in  the  afternoon  on 
the  7th  day  of  December,   1917. 

The  meeting  was  called  to  order  and  presided  over  by  Mr.  William 
A.  Pierce,  President.  The  Secretary  of  the  Company,  Mr.  Morris  H. 
Goodrich,  recorded  the  proceedings  of  the  meeting. 

There  were  present  Messrs.  William  A.  Pierce,  John  H.  Pickering, 
Walter  S.  Laighton,  John  K.  Bates,  Fred  N.  Barney,  Silas  H.  Harvey,  and 
Morris  H.  Goodrich,  constituting  a  quorum  of  the  Board. 

The  Secretary  presented  the  call  and  waiver  signed  by  every  mem- 
ber of  the  Board,  pursuant  to  which  the  meeting  was  held.  In  the  ab- 
sence of  objection,  the  President  ordered  the  call  and  waiver  to  be  spread 
upon  the  Book  of  Minutes  immediately  following  the  minutes  of  the 
present  meeting. 

The  President  then  reported  that  a  very  serious  accident  had  oc- 
curred at  the  Fairfield  plant,  the  boilers  in  the  power  house  haying  ex- 
ploded, tearing  out  one  side  of  the  power  house  and  seriously  injuring 


MINUTES    OF   CORPORATE   MEETINGS  68 1 

three  of  the  employees  of  the  Company.  He  further  stated  that  new 
boilers  for  the  Fairfield  plant  had  been  ordered  at  least  two  months  ago 
and  that  the  old  boilers  were  being  used  only  until  they  could  be  replaced 
with  these  new;  boilers.  .  .  .  He  then  called  upon  Mr.  Arthur  Hurd, 
Counsel  for  the  Company,  for  a  statement  as  to  the  legal  situation. 

Mr.  Hurd  said  that  in  his  opinion  the  injured  employees  had  a  clear 
case  against  the  Company  for  damages,  which  might  be  heavy  as  the 
boilers  were  known  to  be  in  defective  condition,  and  suggested  that  a 
settlement  out  of  the  courts  would  probably  be  politic  as  well  as  econom- 
ical. 

After  some  discussion  the  following  resolution  was  adopted  by  unani- 
mous vote: 

(See  Form  gg.) 

There  being  no  further  business  before  the  meeting,  it  was  declared 
adjourned. 

William  A.  Pierce,  Morris  H.  Goodrich, 

President  Secretary 


Call  and  Waiver  of  Notice  hereto. 

Morris  H.'  Goodrich, 

Secretary 


(See  Chapter  XLI,  "Meetings  of  Directors.") 


CHAPTER    LXXVII 

REPORTS 

Under  the  laws  of  most  of  the  states  corporations  are 
compelled  to  make  certain  reports  to  the  authorities,  mainly 
for  purposes  of  taxation.  Blanks  for  such  reports  are  sup- 
plied by  the  state  or  local  authorities  and  may  usually  be  filled 
with  but  little  trouble.  A  knowledge  of  the  tax  laws  is,  how- 
ever, necessary  at  times  in  order  to  avoid  excessive  taxation, 
and  in  all  cases  where  the  amounts  involved  are  material,  legal 
advice  should  be  employed  in  the  preparation  of  these  reports. 
On  account  of  their  wide  variation  in  form  in  the  different 
states,  these  tax  reports  are  not  presented  here,  the  present 
chapter  being  entirely  confined  to  the  reports  made  to  the 
stockholders  at  their  annual  meeting.  The  forms  given  are 
merely  suggestive,  as  reports  will  necessarily  vary  with  the 
conditions. 

The  usual  reports  submitted  to  the  stockholders  at  their 
annual  meeting  are  those  of  the  president  and  treasurer.  If 
matters  of  special  interest  or  importance  have  occurred  within 
the  province  of  other  officials,  they  may  be  called  upon  for 
reports.  If  any  stockholders*  committees  have  been  appointed 
for  special  investigations  or  other  purposes,  they  will  also 
usually  report  to  the  annual  meeting. 

The  president's  report  is  intended  to  give  a  general  review 
of  the  company's  operations  during  the  preceding  year  and  a 
statement  of  its  condition  at  the  time  of  the  report.      (See 

§355-) 

The  president's  report  is  usually  the  most  important  of 
those  made  to  the  stockholders  at  the  annual  meeting.  In 
many  cases  it  is  the  only  formal  report.    Its  contents  will  vary 

682 


REPORTS 


683 


With  the  operations  of  the  corporation.  When  it  is  the  only 
report  made,  it  will  include  the  financial  statements  that  are 
usually  given  in  the  report  of  the  treasurer.  Any  matters  per- 
taining to  the  progress  of  the  corporate  business  would  proper- 
ly be  brought  out  in  the  report  of  the  chief  executive  officer. 

The  report  that  follows  is  brief  but  sufficiently  compre- 
hensive to  meet  the  proper  demands  of  the  stockholders.  A 
formal  balance  and  income  sheet  would  be  attached  and  the 
whole  would  constitute  the  annual  report  to  stockholders. 

Form  117.     President's  Annual  Report  to  Stockholders 

Report  of  President 


To  the  Stockholders  of  the 

American  Coal  Products  Company: 

The  Directors  herewith  submit  for  the  information  of  the  Stock- 
holders the  following  financial  statements  covering  the  fiscal  year  ended 
December  31,  191 5  ' 

Against  operations  for  the  year  1915  we  have  written  off  a  sufficient 
proportion  of  the  cost  of  our  new  plants  to  bring  their  capitalization 
down  to  a  peace  basis.  We  have  also  instructed  all  of  our  subsidiary 
companies,  in  making  their  returns  for  the  year,  to  charge  off  doubtful 
items. 

Upon  our  regular  profit-sharing  plans  and  special  compensation  to 
all  of  our  wage  earners  we  have  provided  out  of  our  earnings  of  the  year 
for  the  distribution  of  approximately  $550,000,  partly  in  cash  and  partly 
in  stock  Every  employee  of  the  Company  has  received  some  definite 
benefit  from  its  prosperity. 

After  deducting  the  above  items  the  net  profit  for  the  year  amounts 
to   $2,902,236.30 

Deducting  7%  cash  dividends  on  Preferred  Stock 175,000.00 

Leaves    $2,727,236.30 

This  has  been  apportioned  by  the  Directors  as  follows : 
Dividends  on  Common  Stock: 

In  Cash   7% $  761,932.50 

In  Common  Stock  5% 538,000.00 

Reserves    420,000.00 

Surplus    1,007,303.80   $2,727,236.30 

The  excess   of   current  assets   over   current   liabilities 

has  increased  during  the  year  by $3,389,727.30 

and  now  stands  at $8,245,776.93 


684  '     F^^^S   AND    PRECEDENTS 

The  $2,000,000  of  notes  outstanding  a  year  has  been  paid  by  an  issue 
of  approximately  the  same  amount  of  Preferred  Stock.  The  Company 
has  no  obHgations  at  any  bank,  and  $900,000  in  marketable  securities  in 
excess  of  ordinary  needs. 

The  reincorporation  of  the  company  under  the  name  of  "The  Barrett 
Company"  with  a  similar  amount  of  stock  as  this  company  has  been  com- 
pleted and  stock  certificates  in  the  new  corporation  are  being  prepared 
and  will  be  exchanged  share  for  share  for  all  outstanding  certificates  in 
this  company.    Due  notice  will  be  sent  to  all  shareholders. 

Appended  hereto  are  Consolidated  Income  account  for  the  year  1915 
and  Comparative  Consolidated  Balance  Sheet  as  December  31,  1915  and 
1914.* 

Respectfully  submitted, 

William  Hamlin  Childs, 

March  i,  1916.  President 


If  the  president's  report  is  read,  it  gives  an  opportunity 
during  its  reading  or  at  its  end  for  stockholders'  questions 
and  the  explanation  of  any  points  which  are  not  entirely 
clear  in  the  report. 

Form  118.    Treasurer's  Annual  Report  to  Stockholders 
FREEMAN  HARDWARE  COMPANY 


Treasurer's  Annual  Report 


Profit  and  Loss  Statement 
Year  ending  January  i,  1917 

Gross  Sales  $235,125.72 

Returns  and  Allowances  to  be  deducted 9,875.24 

$225,250.48 
Cost    of     Sales,    including    Manufacturing,     Purchase     Costs, 

Freight,   etc 135,154.24 

Gross  Profits  from  Sales $90,096.24 

Deduct : 

SelHng  Expenses: 

Salaries  of  Sales  Force $10,750.00 

Commissions    2,895.25 

Traveling  Expenses 7,962.50 


Statements  omitted. 


REPORTS 

Advertising    5,125.75 

Miscellaneous    Items    1,250.00 


685 


Total  Selling  Expenses $27,983.50 

General  and  Administrative  Expenses : 

Salaries,  Officers    $12,000.00 

"        Office  Employees   7,500.00 

Office  Supplies    785.25 

Postage   425.34 

Telephone  and  Telegrams 325.40 

Depreciation    250.00 

Kiscellaneous  250.74 


Total  General  and  Administrative  Ex- 
penses           21,536.73  49,520.23 


Interest,  Discounts  and  Allowances :  MOo/  -o 

Interest  on  Bonds  ($100,000  at  6%)  $6,000.00 

Discount   on    Sales $7,542.25 

"  "     Purchases  .     4,125.35    3,416.90 


Net  Interest  Charges $9,416.90 

Allowance  for  Doubtful  Accounts 2,750.24  12,167.14 


Net  Profits,  year  ending  January  i,  191 7 $28,408.87 

Balance  Sheet,  January  i,  1917 


Assets 
Real  Estate: 

Land — 20  acres  at  Mahwah,  N.J $7,500.00 

Factory  Buildings  at  Mahwah,  N.  J 95,275.84 

Store  Site,  New  York 80,000.00 

Building,   New  York 40,000.00        $222,775.84 

Factory  Equipment: 

Machinery    $65,249.87 

Belting,  Shafting,  etc 5,742.24 

Small  Tools 1,215.55            72,207.66 

Store  Equipment: 

New  York  5,742.25 

Office  Equipment: 

New  York   $1,200.00 

Mahwah,  N.  J 250.00             1,450.00 

Total   Fixed  Assets $302,175.75 


686  FORMS   AND    PRECEDENTS 

Cash: 

In  Bank $12,725.25 

On    Hand    336.25    $13,061.50 

Accounts  Receivable: 

Trade  Debtors   $35,725.22 

Deduct  Reserve  for  Doubtful  Ac- 
counts         1,250.25      34,474.97 

Notes  Receivable  16,000.00 

Inventories : 

Finished    Products   and    Stock   on 

Hand    $85,242.25 

Goods  in  Process 18,924.25 

Raw  Materials    70,262.24 

Factory  Supplies   1,982.25 

Fuel    1,250.24 

Miscellaneous   Small   Items 1,225.35     178,886.58 

Total  Floating  Assets 242.423.05 

Total  of  Assets $544,598.80 


Liabilities 

Capital  Stock: 

3,000  shares   (par  value  $100  each) $300,000.00 

Bond  Issue: 

100  Bonds   (par  value  $1,000  each) 100,000.00 

Total   Fixed  Liabilities $400,000.00 

Accounts  Payable: 

Trade    Creditors    $30,724.28 

Sundry  Personal  Accounts 525.20 

Notes  Payable 28,235.62 

Total    Floating    Liabilities 59,485.10 

Surplus : 

Balance,  January  2,   1916 $56,704.83 

Net  profit — year  ending  January  2,   1917 28,408.87  85,113.70 

Total  of  Liabilities $544,598.80 

Respectfully  submitted, 

James  H.  Wallace, 

Treasurer 
New  York  City,  N.  Y., 

January  2,  191 7, 


REPORTS 


687 


The  treasurer's  annual  report  should  give  an  accurate 
presentation  of  the  financial  results  of  the  year's  operation 
and  of  the  existing  financial  condition  of  the  company.  To 
what  detail  it  should  extend  will  depend  entirely  on  con- 
ditions. Business  prudence  usually  forbids  a  complete  state- 
ment even  if  it  were  otherwise  desirable.     (See  §  355.) 

The  treasurer's  report  is  presented  to  the  meeting  and 
is  usually  held  open  to  inspection  while  the  meeting  is  in 
progress  but  is  seldom  read  unless  it  is  short,  or  is  to  be 
specially  considered,  or  the  reading  is  requested.  In  the  larger 
corporations  the  report  is  usually  printed  for  distribution 
among  the  stockholders. 

The  treasurer's  report  may  be  entirely  informal,  giving 
only  the  general  results  of  the  operations  for  the  past  year ;  or 
it  may  be  a  detailed  statement  of  the  company's  financial  con- 
dition at  the  end  of  the  year;  or  it  may  take  the  form  of  a 
complete  balance  sheet  with  profit  and  loss  statement.  The 
following  which  is  taken  from  the  annual  report  of  the  United 
Fruit  Company  outlines  the  information  given  by  the  treasurer 
in  detailed  exhibits  and  gives  an  idea  of  the  extent  of  the 
complete  report. 

Form  119.    Introduction  to  Treasurer's  Report 

Treasurer's  Report 


To  the  President  and  Board  of  Directors 
of  the  United  Fruit  Company: 
Gentlemen  : 

I  hand  you  herewith  statements  covering  the  operations  of  the  Com- 
pany for  the  fiscal  year  ending  September  30,  1915,  together  with  reports 
showing  its  financial  condition  on  that  date,  viz.: 

Income  Account 

Balance  Sheet 

Cost  of  Plantations  and  Equipment 

Live  Stock 

Area  of  Owned  and  Leased  Lands 

Area  of  Cultivations 


688  FORMS   AND    PRECEDENTS 

Railways 

Steamship  Service 
Insurance  Fund 

Respectfully  Submitted, 

Charles  A.  Hubbard, 

Treasurer 
Boston,  December  3,  191 5. 


A  committee  report,  unless  of  considerable  length,  is 
usually  presented  and  read.  If  too  lengthy  to  permit  of  this, 
and  of  sufficient  importance  to  justify  the  expense,  it  is  printed 
for  distribution. 

Form  120.    Report  of  Committee  on  By-Laws 
TERREBONNE  CEMENT  COMPANY 


Report  of  Committee  on  By-Laws 


To  the  Stockholders  of  the 

Terrebonne  Cement  Company. 
Gentlemen  : 

Your  committee  appointed  at  the  last  annual  meeting  of  the  stock- 
holders to  report  any  needed  modification  in  the  By-laws  of  this  Com- 
pany, begs  to  submit  the  following: 

1.  We  would  recommend  the  addition  of  a  by-law  providing  for  an 
Executive  Committee,  to  consist  of  three  members  of  the  Board  of  Di- 
rectors, such  Committee  to  have  full  control  of  the  general  business 
affairs  of  the  Company  in  the  interim  between  meetings  of  the  Board. 

2.  We  would  recommend  that  the  present  by-law  relating  to  the 
regular  meetings  of  the  Board  of  Directors  be  so  changed  as  to  provide 
for  quarterly  meetings  instead  of  monthly  meetings  as  at  present. 

3.  We  strongly  disapprove  of  the  suggested  amendment  to  the  by- 
laws whereby  the  amount  of  indebtedness  which  may  be  incurred  by  the 
directors  on  behalf  of  the  Company  at  any  one  time  is  increased  from 
$10,000  to  $25,000,  as  we  believe  such  change  to  be  not  only  unnecessary 
but  against  the  interests  of  the  Company. 

Respectfully  submitted, 

James  F.  Gough, 
Harkness  H.  Lewis, 
Oliver  H.  Simpson, 

Committee  on  By-laws 
New  York  City, 

January  15,  1917. 


CHAPTER    LXXVIII 

MISCELLANEOUS  NOTICES' 

Assessment  Notices 

The  following  form  of  mailing  notice  is  suitable  when 
subscriptions  are  payable  in  instalments  on  demand  of  the 
board.     (See  Forms  8-13.) 

Form  121.    Instalment  Notice 

HUBERT  DESK  COMPANY 
225  Main  St.,  Grand  Rapids,  Mich. 


Instalment  Notice 


Mr.  Howard  Burns, 

Sparta,  Mich.: 
Dear  Sir: 

You  are  hereby  notified  that  by  due  resolution  of  the  Board  of  Di- 
rectors, an  instalment  of  Ten  Per  Cent  on  subscriptions  to  the  stock  of 
this  Company  has  been  called  for,  the  amount  thereof  to  be  paid  to  the 
Treasurer  of  the  Company  on  or  before  the  15th  day  of  October,  1917. 

Henry  H.  Hilbert, 

Treasurer 
Grand  Rapids,  Mich., 

October  i,  1917. 
Shares  subscribed,  25. 
Amount  of  Assessment,  $250. 


Draw  checks  payable  to  Treasurer. 


The  following  form  of  assessment  notice  may  be  used 
as  either  a  mailing  or  publication  notice. 


1  For  notices   of  corporate  meetings   see   Forms  59-68. 

689 


690  FORMS  AND   PRECEDENTS 

Form  122.    Notice  of  Stock  Assessment 

BURNS  REFRIGERATING  COMPANY 


Assessment  Notice 


Notice  is  hereby  given  that  assessment  No.  2  of  Fifteen  Per  Cent  on 
the  subscribed  Capital  Stock  of  this  Company  has  been  called  for  by  due 
resolution  of  the  Board  of  Directors  and  is  payable  to  the  Treasurer  of 
the  Company  on  or  before  the  i8th  day  of  September,  1917. 

Newark,  New  Jersey,  Francis  H.  Wilson, 

August  15th,   191 7.  Secretary 

Make  checks  payable  to  Treasurer. 


In  some  states  the  directors  have  statutory  power  to  levy- 
assessments  under  certain  conditions.  In  several  of  the  west- 
ern states  the  statutes  prescribe  the  form  of  notice  for  such 
assessments.    This  is  substantially  as  follows: 

Form  123.     Notice  of  Stock  Assessment — Statutory 


RED  GULCH  MINING  COMPANY 
Sacramento,  California 


Notice  is  hereby  given  that  at  a  meeting  of  the  Directors  held  on 
the  loth  day  of  October,  1917,  an  assessment  of  Ten  Dollars  per  share 
was  levied  upon  the  Capital  Stock  of  the  corporation,  payable  on  the  12th 
day  of  November,  1917,  to  the  Treasurer  of  said  Red  Gulch  Mining 
Company  at  its  principal  office,  No.  584  J.  Street,  Sacramento,  California. 
Any  stock  upon  which  this  assessment  shall  remain  unpaid  on  the  27th 
day  of  November,  1917,  will  be  delinquent  and  advertised  for  sale  at 
public  auction,  and  unless  payment  is  made  before,  will  be  sold  on  the 
I2th  day  of  December,  1917,  to  pay  said  delinquent  assessment  together 
with  costs  of  advertising  and  expenses  of  sale. 

John  H.  McClelland, 

Secretary 
584  J.  Street,  Sacramento,  Cal. 
October  10,  191 7. 


This  notice  must  be  served  upon  each  stockholder  either 
personally  or  by  mail,  and  must  also  be  published. 


MISCELLANEOUS    NOTICES 


691 


In  case  assessments  are  not  paid  when  due,  public  notice 
must  be  given  before  the  deHnquent  stock  can  be  sold.  A  gen- 
eral form  of  assessment  notice  to  be  used  where  the  specific 
form  is  not  prescribed  by  statute,  is  as  follows : 

Form  124.    Notice  of  Sale  of  Delinquent  Stock 
BURNS  REFRIGERATING  COMPANY 


Notice  of  Sale  of  Delinquent  Stock 


Notice  is  hereby  given  that  the  undersigned,  Treasurer  of  the  Burns 
Refrigerating  Company,  will  on  order  of  the  Board  of  Directors  and 
pursuant  to  the  statutes  in  such  case  made  and  provided,  sell  at  public 
auction  on  the  2nd  day  of  November,  191 7,  at  2  o'clock  in  the  afternoon 
at  the  office  of  the  Company,  345  Broad  St.,  Newark,  New  Jersey,  Twenty 
(20)  Shares  of  the  stock  of  said  Company  now  standing  in  the  name  of 
Howard  T.  Carleton,  or  so  many  of  said  shares  as  may  be  sufficient  to 
satisfy  the  unpaid  assessment  on  said  shares  amounting  to  Three  Hun- 
dred Dollars  ($300),  and  also  the  interest  thereon  from  the  i8th  day  of 
September,  1917,  to  the  date  of  sale,  and  all  necessary  incidental  charges. 

Fifty  Dollars  ($50)  per  share  has  already  been  paid  the  Company 
on  said  stock. 

Howard  W.  Bronson, 

Treasurer 

Newark,  N.  J., 

October  i,  1917. 


Dividend  Notices 

In  the  smaller  corporations  dividend  notices  are  usually 
sent  only  by  mail.  In  the  larger  corporations  they  are  almost 
invariably  published  and  are  usually  also  sent  by  mail. 

Form  125.    Dividend  Notice — Mailing 

CHARLESTON  MILLING  COMPANY 
785  Grand  St.,  New  York 


December  i,  191 7. 
Dear  Sir: 

You  are  hereby  notified  that  the  Directors  of  the  Charleston  Milling 
Company   have   this   day   declared   the   regular   semiannual    dividend   of 


692 


FORMS   AND    PRECEDENTS 


Three  Per  Cent  on  the  Capital  Stock  of  the  Company,  payable  De- 
cember 15,  191 7,  to  stockholders  who  appear  of  record  at  the  close  of 
business  December  14,  1917. 

Harry  H.  McCallum, 

Treasurer 


If  the  transfer  books  are  closed  preparatory  to  payment 
of  dividends,  the  dates  of  closing  and  reopening  should  appear 
as  in  the  following  notice,  which  may  be  used  either  for 
publication  or  for  mailing. 

Form  126.     Dividend  Notice — Publication 

MARTIN  FOUNDRIES  COMPANY 


New  York,  October  i,  1917. 
Dividend  No.  25 
The  Directors  of  the  Martin  Foundries  Company  have  this  day  de- 
clared a  quarterly  dividend  of  One  and  One-Half  Per  Cent  on  the  Capi- 
tal  Stock  of  the  Company,  payable  October  30,   1917,  to  stockholders  of 
record  at  the  close  of  business  October  10,  1917. 

Transfer  books  will  close  October  10,  1917,  and  reopen  October  19, 
191 7.     Checks  will  be  mailed. 

John  H.  Martin, 

Treasurer 


When  notice  of  dividends  is  by  publication  alone,  an 
explanatory  statement  usually  accompanies  the  dividend  check. 
An  announcement  of  this  nature  used  by  some  of  the  larger 
corporations  is  given  in  the  following  form. 

Form  127.    Notice  Accompanying  Dividend  Check 
MARTIN  FOUNDRIES   COMPANY 


New  York,  October  30,  1917. 

On  October  ist,  1917,  the  Directors  declared  quarterly  dividend  No. 
25  of  One  and  One-half  Per  Cent  upon  the  Preferred  Stock  of  the  Com- 
pany, payable  this  day  to  stockholders  of  record  of  October  10,  1917. 

In  accordance  with  permanent  order  on  file,  enclosed  please  find  check 
for  above  dividend  on  the  Preferred  Stock  standing  in  your  name.  No 
acknowledgment  is  necessary. 


MISCELLANEOUS    NOTICES 


693 


Kindly  advise  John  J.  Hart,  Assistant  Secretary,  No.  575  Broadway, 
New  York,  of  any  change  in  your  address,  giving  your  old  address  as  well 
as  the  new. 

John  H.  Martin, 

Treasurer 


Dividend  check  enclosed  which  please  cash  Immediately. 


The  following  publication  notice  is  somewhat  informal  but 
sufficient. 

Form  128.     Dividend  Notice 

UNITED  STATES  MOTOR  COMPANY 

Dividend  No.  25  of  J/^  of  1%  on  the  Common  Stock,  for  the  quarter 
ending  June  30,  191 7,  was  declared  July  28,  payable  September  30,  to 
stockholders  of  record  September  9.  Transfer  books  close  at  3  p.m. 
September  9  and  reopen  at  10  a.  m.,  October  i,  1917. 

Richard  Harding, 

Secretary 


This  notice  is  signed  by  the  secretary  of  the  corporation, 
who  in  this  case  is  also  its  treasurer.  Usually,  though  not 
necessarily,  dividend  notices  are  signed  by  the  treasurer. 

Form  129.     Dividend  Notice — Common  Stock 

Office  of 
AMERICAN  REDUCTION  COMPANY 


No.  145  Broadway,  New  York  City, 
September  4,  1917. 
Quarterly  Common   Stock   Dividend  No.   17 
The  Directors  of  the  American  Reduction  Company  have  this  day  de- 
clared a  dividend  of  Two   Per  Cent  on  the  Common   Capital    Stock  of 
the  Company,  payable  October   15,   1917,  to  stockholders  of   record  Sep- 
tember 28,   1917.     The  books  of  the  Company  for  the  transfer  of  Com- 
mon Stock  will  be  closed  at  3  o'clock  p.m.,  September  28,  1917,  and  will 
be  reopened  October  2,  1908. 

M.  W.  Erickson, 

Secretary 


694 


FORMS   AND    PRECEDENTS 


The  following  publication  notice  covers  the  dividend  on 
both  common  and  preferred  stock.  This  inclusion  is  not  in 
any  way  objectionable,  but  at  times,  for  the  sake  of  greater 
emphasis  and  publicity,  a  separate  notice  for  each  dividend  is 
preferred. 

Form  130.     Dividend  Notice — Common  and  Preferred  Stock 
McKINNEY  COMPANIES 


The  regular  quarterly  dividend  of  One  Per  Cent  on  the  Preferred 
Shares  and  the  regular  quarterly  dividend  of  One  Per  Cent  on  the  Com- 
mon Shares  in  the  McKinney  Companies  will  be  paid  January  2,  1918,  to 
shareholders  of  record  as  they  appear  at  the  close  of  business  Decem- 
ber 14,  1917. 

The  transfer  books  will  be  closed  for  four  days  only,  December  15, 
16,  17,  and  18,  1917. 

Horace  C.  King, 

Secretary 

Dated  November  27,  191 7. 


Form  131.     Dividend  Notice — Mailing  Orders  Requested 


SOUTHERN  PACIFIC  CO. 
Dividend  No.  43 

A  Quarterly  Dividend  of  one  dollar  and  fifty  cents  ($1.50)  per  share 
on  the  Capital  Stock  of  this  Company  has  been  declared  payable  at  the 
Treasurer's  Office,  No.  165  Broadway,  New  York,  N.  Y.,  on  July  2,  1917, 
to  stockholders  of  record  at  3  o'clock  P.  M.,  on  Thursday,  May  31,  1917. 
The  stock  transfer  books  will  not  be  closed  for  the  payment  of  this 
dividend.  Cheques  will  be  mailed  only  to  stockholders  who  have  filed 
permanent  dividend  orders. 

A.  K.  Van  Deventer, 

May  10,  1917.  Treasurer 


The  mailing  order  referred  to  in  the  foregoing  dividend 
notice  is  shown  on  the  following  pages.  The  form  as  given 
is  an  exact  reproduction  of  the  or^^inal. 


MISCELLANEOUS   NOTICES  695 

Form  132.     Mailing  Order  for  Dividends 

No  Cheque  Mailed  Without  an  Order 


To  the  Treasurer  of  Southern  Pacific  Company, 

165  Broadway,  Nezv  York,  N.  Y. 

Until  this  order  shall  be  revoked  in  writing,  please  send  by  mail, 

in  cheque  payable  to  the  order  of _...•• 

See  r 

printed 

instructions. 

(Please   write 

distinctly. 


ions.    <    ^'S    C 
vrite       :§  ^< 


all  dividends  now  due,  or  which  may  hereafter  become  due,  on  all  stock 

now  standing  or  which  may  hereafter  stand,  on   the  books  of  your 

Company  in name. 

Sign  here   1  

(Date)  exactly  as    I 

name  ap-      r 

pears  on       I 


stock  ^ 


When  pavment  is  to  be  made  to  other  than  the  stockholder,  signature  of  the 
latter  MUST  be  acknowledged  before  a  Notary  Public  on  the  back  of  this  order, 
and  if  signed  by  an  Attorney,  Administrator,  Executor,  Guardian  or  Trustee,  it 
MUST  be  accompanied  by  satisfactory  evidence  of  the  signer's  authority. 

On  the  back  of  this  mailing  notice  appears  form  for 
notarial  acknowledgment. 

Notices  of  Appointment 

When  an  election  is  held,  it  devolves  upon  the  secretary 
to  notify  the  ofhcials-elect. 

Form  133.    Notice  of  Election  as  Director 

ORVELLE   MACHINE  WORKS 
Trenton,  New  Jersey 

December  10,  1917. 
Mr.  George  W.  Bromleigh, 
236  Greenwood  Ave., 
Trenton,  N.  J. 
Dear  Sir: 

You  are  hereby  notified  that  at  the  annual  meeting  of  the  Orvelle 
Machine  Works  held  this  day,  you  were  elected  a  member  of  its  Board  of 
Directors. 


696  FORMS   AND    PRECEDENTS 

The  next  regular  meeting  of  the  Board  will  be  held  in  the  office  of 
the  Company,  January  5,  1918,  at  3  o'clock  p.m.,  for  the  election  of  offi- 
cers and  for  the  transaction  of  such  other  business  as  may  come  before 
the  meeting. 

You  are  requested  to  be  present  and  participate  in  that  meeting. 

Respectfully, 

Martin  B.  Hereford, 

Secretary 


Usually  before  the  election  of  a  director,  those  interested 
assure  themselves  that  he  will  serve  if  elected.  In  such  case 
the  notification  need  not  ask  his  acceptance  of  the  position. 
If,  however,  there  is  any  uncertainty,  the  notification  of  elec- 
tion should  request  a  formal  acceptance  of  the  position.  If  the 
director-elect  refuses  to  accept,  his  election  is  void,  as  he 
cannot  be  forced  into  office  against  his  will. 

Form  134.     Notice  of  Election  as  Director — Acceptance  Re- 
quested 

BLACK  DIAMOND  DRILL  COMPANY 
23  State  St.,  Boston,  Massachusetts 


October  10,   1917. 
Mr.  Horace  H.  Fleming, 
1716  State  St., 

Boston,  Mass. 
Dear  Sir: 

At  a  meeting  of  the  Directors  of  this  Company  held  this  loth  day 
of  October,  1917,  you  were  elected  a  member  of  the  Board  to  fill  the 
vacancy  caused  by  the  death  of  Mr.  Frederick  Colwell.  Will  you  kindly 
indicate  your  acceptance  of  the  position  at  your  early  convenience. 

Respectfully, 

SiMRELL  B.  Ives, 

Secretary 


As  a  rule,  when  corporate  officials  are  elected,  either  the 
officers-elect  are  present  at  the  meeting  at  which  their  election 
occurs,  or  are  in  such  close  personal  touch  with  the  corporate 
proceedings  that  formal  notice  of  their  election  is  unnecessary. 


MISCELLANEOUS    NOTICES 


697 


If,  however,   a  stranger  is  elected  to  an  official  corporate 
position,  notice  must  be  given. 

Form  135.    Notice  of  Election  as  General  Manager 


WILLIS  OIL  WELL  COMPANY 
265  Madison  Avenue,  New  York 

October  i,   1917. 
Mr.  Henry  P.  Simpson, 
445  Greenwood  Ave., 

Newark,  New  Jersey. 
Dear  Sir: 

At  a  meeting  of  the  Board  of  Directors  of  this  Company  held  this 
day,  you  were  elected  General  Manager  of  the  Company  at  a  salary  of 
Twenty-four  Hundred  Dollars  per  annum,  payable  in  monthly  instal- 
ments of  Two  Hundred  Dollars  each,  your  employment  and  duties  to 
begin  on  the  15th  day  of  October,  1917,  and  the  first  instalment  of  your 
salary  to  be  due  and  payable  on  the  15th  day  of  the  following  month. 
Will  you  kindly  notify  me  without  delay  of  your  acceptance  of  the 
position  and  report  for  duty  on  the  day  above  designated. 

Yours   very   truly, 

Gerald  E.  Conway, 

Secretary 


If  it  is  doubtful  that  the  party  elected  will  accept  the  posi- 
tion, his  appointment  and  notice  thereof  are  usually  made 
tentative  as  in  the  following  example. 

Form  136.    Tender  of  Position  as  Sales  Manager 


HOWARD   DESK  COMPANY 
25  Stone  St.,  New  York 

October  30,   1917. 
Mr.  Willis  H.  Walters, 

225  Broadway,  New  York. 
Dear  Sir: 

I  am  instructed  by  the  Board  of  Directors  to  tender  you  the  position 

of   Sales   Manager  of   this   Company   at   a   salary  of  $1,800   per   annum, 

payable  in  monthly  instalments  of  $150  each,  your  employment  and  duties 

to  begin  in  case  of  your  acceptance,  on  the  loth  day  of  November,  1917. 

Your  early  action  in  the  matter  will  greatly  oblige, 

Yours  very  truly, 

Sherwin  F.  Hamilton, 

Secretary 


CHAPTER    LXXIX 

RESIGNATIONS 

Resignations  may  be  divided  into  two  general  classes — 
those  which  are  so  phrased  as  to  be  completely  effective  with- 
out an  acceptance,  which  may  be  termed  peremptory  resig- 
nations, and  those  which  are  tentative  in  their  nature  and 
therefore  not  effective  until  accepted.  The  following  form 
is  of  the  latter  nature. 

Form  137.    Resignation  of  Director 


To  the  Board  of  Directors  of  the 
Howard  Scale  Company. 
Gentlemen  : 

On  account  of  my  continued  ill  health,  which  prevents  my  proper 
attention  to  the  duties  of  the  position,  I  hereby  tender  my  resignation 
as  a  member  of  your  body. 

Very  respectfully, 

Henry  H.  Gale 
New  York  City, 

September  30,    1917. 


If  a  resignation  of  this  kind  is  accepted  without  quali- 
fication, its  effect  is  immediate  and  the  resigning  director, 
though  present  at  the  meeting,  ceases  to  be  a  director  at 
the  moment  the  resolution  or  motion  of  acceptance  is  adopted. 
If  it  is  desired  to  avoid  this,  acceptances  may  be  phrased  "to 
take  effect  at  the  close  of  the  meeting."  It  may  be  noted  in 
this  connection  that  a  director  retiring  by  resignation  cannot 
legally  vote  on  his  own  successor.  The  vacancy  does  not  exist 
until  his  resignation  is  effective  and  thereafter  he  is  not  a 
director. 

698 


RESIGNATIONS 


699 


Dummy  directors  are  sometimes  elected  to  fill  a  posi- 
tion or  vacancy  in  the  board  until  a  permanent  incumbent 
is  elected.  In  such  case  the  dummy  director's  resignation 
in  tentative  form  is  usually  secured  at  the  time  of  his  elec- 
tion and  is  placed  on  file.  Then  when  a  suitable  person  for 
permanent  director  has  been  found,  the  resignation  on  file 
is  accepted  and  the  successor  is  at  once  elected.  The  follow- 
ing form  of  resignation  is  commonly  used  under  such  circum- 
stances. 

Form  138.    Resignation  of  Director — Effective  on  Acceptance 


To  the  Board  of  Directors  of  the 

Harvard  Publishing  Company. 
Gentlemen  : 

I  hereby  tender  my  resignation  as  a  member  of  your  body,  to  take 
effect  upon  acceptance. 

Respectfully, 

Frank  McClelland 
New  York  City, 

September  i,  1917. 


This  resignation  holds  good  until  acceptance  or  until  the 
party's  term  as  director  expires,  unless  sooner  withdrawn. 
If  the  party  is  again  elected  as  a  director,  his  old  resignation 
is  of  no  further  effect  and  must  be  renewed  if  his  same  un- 
certain tenure  of  office  is  to  be  maintained.  It  must  be  remem- 
bered, however,  that  a  party  tendering  such  a  resignation  has 
the  right  to  withdraw  it  or  to  revoke  it  at  any  time  prior  to 
its  acceptance. 

The  final  clause  of  the  foregoing  resignation,  while  con- 
ventional, is  of  no  direct  effect.  A  "tendered"  resignation 
cannot  take  effect  until  accepted. 

The  following  form  terminates  the  official  status  of  party 
signing  same  as  soon  as  the  document  is  filed  with  the  secre- 
tary of  the  company.     No  action  of  the  board  is  required 


700 


FORMS   AND    PRECEDENTS 


nor  can  the  board  in  any  way  prevent  its  effect.  This  peremp- 
tory form  of  resignation  is  often  employed  in  cases  where 
a  director  wishes  to  escape  responsibiHty  for  some  proposed 
action  of  the  board  or  wishes  to  express  his  disapproval  of 
some  board  action.  It  does  not  relieve  him  from  any  respon- 
sibility for  past  actions  but  does  relieve  him  from  responsibility 
for  any  future  board  actions. 

Form  139.    Resignation  of  Director — Peremptory 


To  the  Board  of  Directors  of  the 

Franklin  Electric  Corporation. 
Gentlemen  : 

I  hereby  resign  my  position  as  a  director  of  the  Franklin  Electric 
Corporation,  my  resignation  to  take  immediate  effect 

Respectfully, 

William  H.  Collins 
New  Brighton,  Pa., 
October  22,  1917. 


A  resignation  may  be  made  effective  at  a  future  date  as 
in  the  following  form.  The  object  of  such  a  deferred  resig- 
nation is  usually  to  give  time  for  the  selection  of  a  suitable 
successor. 

Form  140.    Resignation  of  Director — Future  Date 


To  the  Board  of  Directors  of  the 

Cooperstown  Tannery. 
Gentlemen  : 

I  hereby  resign  my  membership  in  your  body,  such  resignation  to  be 
effective  October  21,  1917. 

Respectfully, 

Howard  McCall 
Cooperstown,  New  York, 
October   i,   1917. 


When,  as  occasionally  happens,  some  difficulty  has  arisen 
between  the  directors  and  an  official,  and  this  latter  wishes 


RESIGNATIONS  ^Oj 

a  vote  of  confidence  or  an  expression  of  the  feeling  of  the 
board  towards  him,  he  will  hand  in  a  tentative  resignation 
as  in  the  following  form. 

Form  141.    Resignation  of  President — Conditional 


To  the  Board  of  Directors  of  the 

Standard  Milling  Company. 
Gentlemen  : 

I  hereby  tender  my  resignation  as  President  and  Director  of  your 
Company  and  request  your  immediate  action  thereon. 
Very  respectfully, 

Henry  H.  Maxwell 
Franklin,  Pa., 

November  2,  1917. 


If  a  majority  of  the  board  wish  to  retain  the  president, 
they  either  vote  that  the  resignation  be  not  accepted  or  vote 
against  a  motion  for  its  acceptance.  In  either  case  the  presi- 
dent's resignation  is  ot  no  effect  and  the  incident  is  merely 
an  indorsement  of  him  and  his  position.  If,  however,  those 
opposed  to  the  president  are  a  majority  and  accept  the  resig- 
nation, his  official  connection  with  the  company  is  peremptorily 
terminated. 

A  more  friendly  resignation  is  given  in  the  following 
form. 

Form  142.    Resignation  of  Treasurer 

New  York,  October  28,  191 7. 
To  the  Board  of  Directors  of  the 
Otis  Machine  Company, 

43  Dey  St.,  New  York. 
Gentlemen  : 

I  am  offered  the  position  of  Treasurer  of  the  Los  Angeles  Fruit 
Company  of  Los  Angeles,  California,  and  on  account  of  the  condition 
of  my  health  am  very  desirous  of  accepting  the  same.  I  therefore  hereby 
tender  my  resignation  as  Treasurer  of  the  Otis  Machine  Company  and 
ask  your  acceptance  of  same  at  the  earliest  possible  date.  I  would  also 
request  the  early  appointment  of  a  committee  to  audit  my  accounts  and 


702 


FORMS   AND    PRECEDENTS 


the  due  authorization  of  my  successor  to  take  over  and  receipt  for  the 
moneys  and  other  property  of  the  Company  now  in  my  charge. 

Regretting  the  termination  of  my  pleasant  official  relations  with  the 
Company  and  thanking  you  for  the  uniformly  kind  consideration  ac- 
corded me  by  your  body,  I  remain, 

Respectfully, 

James  H.  McDonald 


Resignations  and  other  communications  for  the  board  of 
directors  are  frequently  addressed  to  the  secretary  or  even 
to  the  president  of  the  company.  The  better  practice  is  to 
address  the  communication  to  the  board,  enclosing  it  in  an 
envelope  addressed  to  the  secretary  or  the  president  of  the 
company,  as  the  case  may  be.  It  is  then  the  duty  of  the  officer 
receiving  the  communication  to  present  it  to  the  board  Such 
service  on,  or  delivery  to,  the  president  or  secretary  is  legally 
sufficient. 


CHAPTER   LXXX 

CORPORATE  AND  OFFICIAL  SIGNATURES 

The  signature  of  a  corporate  official  followed  by  his  official 
designation  is  usually  referred  to  as  an  ^'official"  signature 
(Forms  143,  144).  The  name  of  a  corporation  duly  affixed 
and  evidenced  by  the  signature  of  the  affixing  officer  or  officers 
is  known  as  a  "corporate"  signature  (Forms  145,  146). 

Speaking  generally,  the  corporate  signature  is  affixed  to 
all  important  instruments  by  which  the  corporation  itself  is 
to  be  directly  and  legally  obligated,  while  the  official  signatures 
are  employed  by  the  corporate  officials  in  matters  pertaining 
particularly  to  their  respective  departments,  in  which  the  con- 
tract relations  of  the  corporation  do  not  enter  in,  or,  if  other- 
wise, the  authority  of  the  officer  signing  is  sufficient  to  sustain 
his  action. 

Thus,  the  president  signs  reports,  letters,  instruments,  etc., 
with  his  official  signature ;  the  treasurer  signs  notices  of  divi- 
dends or  assessments,  financial  statements,  and  even  corporate 
checks  and  reports  in  the  same  manner;  while  the  secretary 
affixes  his  official  signature  to  the  minutes  of  meetings,  to 
reports,  notices,  certificates,  etc. 

In  regard  to  letter  signatures,  practice  varies  widely.  In 
perhaps  the  majority  of  corporations  the  corporate  signature 
is  attached  to  every  letter  pertaining  to  the  business  of  the 
corporation  unless  there  is  some  special  reason  for  a  different 
signature.  In  many  corporations,  however,  this  practice  is 
exactly  reversed,  the  official  signature  of  the  writer  being 
always  employed  unless  there  is  some  special  reason  for  the 
corporate  signature.    The  former  is  the  preferable  plan. 

703 


704  .  FORMS   AND    PRECEDENTS 

Form  143.     Official  Signature — Informal 


Joseph  H.  McPherson, 

President 


This  is  the  simplest  form  of  official  signature.  It  should 
be  used  only  when  the  letter  or  other  instrument  to  which 
it  is  appended  shows  plainly  and  unmistakably,  by  heading 
or  subject  matter,  of  what  company  the  person  signing  is  an 
official.  If  this  is  not  the  case,  the  official  signature  should 
be  written  in  full  as  in  the  following  form. 

Form  144.    Official  Signature — Formal 


Joseph  H.  MacPherson, 

President  Holland  Typewriter  Co. 


The  following  corporate  signature  is  in  its  simplest  form. 
Form  145.    Corporate  Signature — Informal 


(i)                       Ramsay  Water  Company, 
By 

President 
(2)  ■  Ramsay  Water  Company, 

By  Howard  Ramsay, 

President 


The  first  of  these  forms  shows  a  partial  corporate  sig- 
nature— usually  affixed  by  means  of  a  rubber  stamp — await- 
ing completion  by  the  insertion  of  the  president's  signature 
as  shown  in  the  second  form. 

The  word  "By"  as  given  in  the  preceding  form  is  some- 
times omitted  from  the  corporate  signature.  The  word  is, 
however,  employed  by  a  majority  of  the  best  conducted  cor- 


CORPORATE   AND   OFFICIAL   SIGNATURES 


705 


porations  of  the  country  and  its  omission  may,  under  some 
circumstances,  involve  the  officer  v^hose  name  is  affixed  in 
a  personal  liability.  (See  comment  preceding  Form  163.) 
The  form  as  given  is  therefore  regarded  as  distinctly  pref- 
erable. 

When  the  corporate  signature  is  affixed  to  important  in- 
struments, usually  though  not  necessarily  two  or  more  official 
signatures  are  employed.  The  seal  is  also  usually  affixed  even 
v^^hen  not  legally  necessary.  It  is  to  be  remembered  that  seals 
were  used  before  signatures  and  for  many  years  corporations 
used  seals  without  any  written  signatures. 

Form  146.    Corporate  Signature — Formal 


Western  Chemical  Company, 
By  Joseph  H.  McCleary, 
J  CORPORATE  I  President 

X      SEAL      j  Frederick  Wellman, 

Secretary 


The  corporate  signature  may  be  legally  affixed  by  any 
corporate  official  or  agent  authorized  thereto  by  the  directors 
or  by-laws.  In  all  current  business,  however,  where  but  one 
signing  officer  is  desired,  the  president  is  usually  designated, 
unless  the  transaction  pertains  specially  to  the  department  of 
some  other  official. 

When  the  secretary's  name  is  employed  in  a  corporate 
signature,  as  in  the  foregoing  form,  no  specific  attestation 
of  the  seal  is  usual  or  necessary.  If  otherwise,  the  seal  should 
be  formally  attested  as  in  the  following  form  which  gives  the 
corporate  signature  usually  employed. 

Signatures  affixed  to  formal  instruments  are  customarily 
preceded  by  an  explanatory  statement  termed  a  "testimonium 
clause." 


7o6 


FORMS   AND    PRECEDENTS 


Form  147.     Testimonium  Clause — Corporate  Signature — Seal 
Attested 


In  Witness  Whereof,  the  said  Powell  Steel  Company 
has  caused  its  corporate  name  to  be  hereunto  sub- 
scribed by  its  President  and  its  duly  attested  corpo- 
rate seal  to  be  hereunto  affixed  by  its  Secretary,  all 
in  the  City  of  Hartford,  State  of  Connecticut,  on  the 
25th  day  of  August,  191 7. 
Powell  Steel  Company, 

By  Alexander  H.  McDowell, 

President 


f  CORPORATE 

1 


SEAL 


Attest  Seal: 

Franklin  B.  Lord, 

Secretary 


The  following  is  a  convenient  form  of  testimonium  clause 
when  the  instrument  is  to  be  signed  by  two  or  more  cor- 
porations. 

Form  148.    Testimonium  Clause — Two  Corporate  Signatures 


{  CORPORATE  I 
I         SEAL         5 


In  Witness  Whereof,  the  said  parties  of  the  first  and 
second  parts  have  caused  their  respective  corporate 
signatures  and  seals  to  be  hereunto  affixed  by  their 
duly  authorized  officers,  in  the  City,  County,  and 
State  of  New  York,  on  the  day  and  year  first  above 
written. 

Arlington  Brass  Works, 
By  Henry  Brierly, 

President 


Attest  Seal: 

John  H.  Savage, 

Secretary 


J  corporate  I 
(      seal      3 


Attest  Seal: 

Henry  M.  Sunthein, 

Secretary 


Newark  Castings  Company, 
By  Horace  D.  Powers, 

President 


A  more  formal  testimonium  clause  for  a  corporate  and 
individual  signature  is  as  follows: 


CORPORATE   AND   OFFICIAL   SIGNATURES  707 

Form  149.     Testimonium  Clause — Corporate  and  Individual 
Signatures 


In  Witness  Whereof,  the  Little  Falls  Carpet  Company, 
said  party  of  the  first  part,  has  caused  its  corporate 
seal  to  be  affixed  to  this  indenture  and  its  corporate 
signature  to  be  subscribed  hereunto  by  its  President 
and  Secretary  duly  authorized  thereunto,  and  the  said 
Harrison  H.  Spellman,  party  of  the  second  part,  has 
affixed  his  signature  and  seal  hereunto,  all  being  done 
in  the  City  of  Trenton,  State  of  New  Jersey,  on  the 
day  and  year  first  above  written. 
\  CORPORATE  )  Little  Falls  Carpet  Company, 

I      SEAL      3  By  Willis  H.  Shelley, 

President 
James  H.  McClelland, 

Secretary 
Harrison  H.  Spellman  [l.  s.] 


If  a  contract  is  signed  by  an  agent,  the  corporate  seal 
is  not  usually  affixed. 

Form  150.    Testimonium  Clause — Signature  Affixed  by  Agent 

In  Witness  Whereof,  the  said  Milton  Smelting  Cor- 
poration, party  of  the  first  part,  acting  through  its 
duly  appointed  agent,  Mortimer  H.  Shepherd,  au- 
thorized thereunto  by  resolution  of  its  Board  of 
Directors  (certified  copy  of  which  resolution  under 
the  corporate  seal  is  hereunto  annexed),  has  caused 
its  corporate  signature  to  be  hereunto  affixed,  and 
Samuel  Jaros,  party  of  the  second  part,  has  here- 
unto affixed  his  signature  and  seal,  all  on  the  day 
and  year  first  above  written. 

Milton  Smelting  Corporation, 

By  Mortimer  H.  Shepherd, 

Agent 
Samuel  Jaros        [l.  s.] 


A  copy  of  the  resolution  which  authorizes  the  agent  to 
execute  the  instrument  on  behalf  of  the  corporation,  duly 
certified  under  the  corporate  seal,  should  be  attached  to  the 
instrument.     (See  also  Forms  165,  166,  183,  184.) 


CHAPTER    LXXXI 

CHECKS,  RECEIPTS,  AND  NOTES 
Corporate  Checks 

The  form  of  signature  to  a  corporate  check  is  not  material. 
Its  purpose  is  merely  to  identify  and  authenticate  the  instru- 
ment, and  any  signature  duly  prescribed  by  the  by-laws  or 
by  resolution  of  the  directors  and  recognized  by  the  com- 
pany's bank  is  sufficient.  Consequently,  while  the  corporate 
signature  is  usually  to  be  preferred,  there  is  in  practice  much 
variation  as  shown  in  the  forms  which  follow. 

The  corporate  seal  is  seldom  if  ever  used  on  corporate 
checks,  though  its  use  does  not  affect  the  check  in  any  way. 
When  the  corporate  funds  are  material  in  amount,  the  names 
of  two  officials,  the  president  and  treasurer,  are  usually  re- 
quired upon  the  check. 

The  forms  of  check  which  follow  are  in  common  use. 

Form  151.    Check — Corporate  Signature 


No.  1754  New  York,  August  i,  1917. 

SEABOARD  NATIONAL  BANK 
of  the  City  of  New  York 

Pay  to  the  order  of  John  H.  Wilkins $425.75 

Four  Hundred  and  Twenty-Five   75/100 Dollars. 

Standard  Radiator  Company, 
Samuel  S.   Steigel, 

President 
Stewart  H.  Wilson, 

Treasurer 

708 


CHECKS,    RECEIPTS,   AND   NOTES 


709 


Frequently  the  number  is  placed  in  the  upper  right-hand 
corner  of  a  check,  the  date  line  coming  in  above  or  below. 
Such  an  arrangement,  with  the  other  details  as  shown  in  the 
form  given,  is  highly  approved  by  bank  officials,  as  it  brings 
the  essential  features  of  the  check — number,  date,  amount, 
payee,  and  signature — all  well  over  to  the  right-hand  side 
of  the  check  in  the  most  convenient  position  for  rapid  ref- 
erence. 

If  the  by-laws  or  a  directors'  resolution  require  that  the 
corporate  name  be  affixed  by  the  treasurer  and  the  check  be 
coimtersigned  by  the  president,  as  is  frequently  the  case,  the 
following  form  is  approved. 

Form  152.    Check — Countersigned 


No.  244.  New  York,  September  8,  1917. 

STANDARD  NATIONAL  BANK 
of  the  City  of  New  York 

Pay  to  the  order  of  Howard  P.  Huntington $475-00 

Four  Hundred  and  Seventy-Five  no/ioo Dollars. 


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Countersigned : 

James  J.  McLane, 
President 


Merrivale  Coal  Company, 
By  Horace  P.  Wisner, 
Treasurer 


Form  153.    Check — Official  Signatures 


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No.  1582. 


New  York,  October  1,   1917. 


THE  PEOPLE'S  NATIONAL  BANK 
of  New  York 


Pay  to  the  order  of  Jesse  Claire $12545 

One  Hundred  and  Twenty-Five  45/ioo Dollars. 


Wallace  McComb, 

President 


Perry  H.  Ducroix, 
Treasurer 


^lO  FORMS   AND    PRECEDENTS 

Form  154.    Check — Official  Signatures — Purpose  Stated 


No.  745.  New  York,  October  i,  191 7. 

BANK  OF  MANHATTAN 
of   New  York   City 

Pay  to  the  order  of  James  &  Oliver $125.75 

One  Hundred  and  Twenty- Five  75/100 Dollars. 

Rudolf  Hessler, 
In  full  for  President 

September  printing.  Jasper  H.  McMeis, 

Treasurer 


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Where  the  official  signatures  of  the  treasurer  and  the 
president  are  affixed,  the  form  is  usually  as  above. 

There  is  no  objection,  legal  or  practical,  to  the  entry 
on  a  check  of  the  purpose  for  which  it  is  issued,  if  so  placed 
as  not  to  obscure  or  interfere  with  its  essential  details.  The  ad- 
vantage in  the  use  of  such  a  check  is  apparent.  Duly  indorsed, 
as  it  must  be  before  payment  is  made,  the  check  itself  affords 
the  best  possible  evidence  of  the  settlement  effected  thereby, 
and  saves  the  expense  and  trouble  of  a  more  formal  receipt. 

A  form  of  check  much  in  favor  because  of  the  promi- 
nence given  to  the  name  of  the  issuing  corporation,  is  as 
follows: 

Form  155.     Check — Draft  Form 


ALLIS-WILKINS  COMPANY 
1675  Broadway,  New  York 

No.  1728.  August  15,  1917. 

Pay  to  the  order  of  Jesse  H.  Sinclair $3525 

Thirty-five  25/100 Dollars. 

Allis-Wilkins  Company, 
By  Francis  H.  Whitman, 

Treasurer 
To  the 

Seaboard  National  Bank, 
New  York 


CHECKS.   RECEIPTS,   AND   NOTES 


711 


In  the  smaller  corporations  dividends  are  usually  paid 
by  means  of  the  ordinary  corporate  check,  the  words  "Divi- 
dend Check"  being  stamped  or  written  across  its  face.  In 
the  larger  corporations  special  checks  are  employed  for  the 
purpose,  as  in  the  following  form: 

Form  156.    Dividend  Check 


AMERICAN  WOOL  EXPORT  COMPANY 

New  York,  August  31,  1917.  No.  148: 


AMERICAN  NATIONAL  BANK 

of  New  York 

Pay  to  the  order  of 

Henry  H.  McCall ^125.00 

One  Hundred  and  Twenty-Five  00/100 , Dollars. 

Countersigned : 

Stock  Transfer  Department, 
John  Frenckel,  Transfer  Agent  Frank  S.  Jordan, 

Treasurer 


No  receipt  is  usually  required  when  this  form  of  dividend 
check  is  employed,  the  duly  indorsed  check  in  itself  affording 
the  best  possible  evidence  of  payment  of  the  dividend. 

The  ordinary  indorsement  of  a  corporate  check  is  given 
in  the  following  form. 

Form  157.     Indorsement  of  Corporate  Check 


C/2 


-•12  FORMS   AND    PRECEDENlb 

This  indorsement  is  usually  affixed  by  the  treasurer  or 
cashier,  though  the  president  is  frequently  authorized  thereto. 

The  following  form  of  indorsement  is  usually  affixed  in 
its  entirety — corporate  name,  official  signature,  and  all — with 
a  rubber  stamp.  Such  an  indorsement  is  approved  by  the 
banks  and,  on  account  of  the  rapidity  and  convenience  with 
which  it  may  be  affixed,  is  generally  employed. 

Form  158.    Indorsement  of  Check  for  Deposit 


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The  following  is  a  common  form  of  corporate  draft,  signed 
by  one  official. 

Form  159.    Corporate  Draft 


No.  745.  New  York,  October  i,  1917. 

Three  days  after  sight  pay  to  the  order  of 

Seaboard  National  Bank  of  New  York $1,245.25 

Twelve  Hundred  and  Forty- Five  25/100 Dollars 

payment  of  account  as  per  our  statement  of  September  i,  1917. 
Value  received.    Charge  same  to  account  of 

Car  Equipment  Company, 
By  Howard  James, 

Treasurer 
To  North  Wheeling  Car  Co., 
Wheeling,  West  Virginia 


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CHECKS,  RECEIPTS,  AND  NOTES         ^13 

Corporate  Receipts 
A  common  form  of  corporate  receipt  is  as  follows: 
Form  160.    Corporate  Receipt 

$250.00  New  York,  July  15,  1917. 

Received  from  Edward  M.  Blair  Two  Hundred  and  Fifty- 
Dollars,  rental  of  Store  at  No.  65  Vesey  St.  for  September. 

Metropolitan   Realty   Company, 
By  Samuel  F.  Watkins, 

Treasurer 


It  would  seem  preferable  that  all  receipts  for  money  re- 
ceived by  a  corporation  should  be  given  in  the  corporate 
name.  In  practice,  however,  corporate  receipts  are  commonly 
signed  by  the  treasurer.  In  such  case  the  name  of  the  cor- 
poration should  appear  prominently. 

Form  161.    Corporate  Receipt — Official  Signature 


$725.25  September  15,  1917. 

WELLMAN  SUPPLY  CORPORATION 
265  Chambers  St.,  New  York 
Received  from  the  Jackson  Hardware  Company  Seven  Hundred  and 
Twenty-five  25/100  Dollars  in  full  of  account. 

H.  J.  Ashton, 

Treasurer 


The  larger  corporations,  when  dividends  are  to  be  paid, 
employ  dividend  checks  (Form  156),  which  when  properly 
indorsed  and  deposited,  are  usually  regarded  as  all  sufficient 
receipts.  It  is  easy  to  devise  some  form  of  voucher  check 
which  will  satisfactorily  meet  the  situation. 

If,  however,  formal  receipts  are  desired,  the  following 
form  will  serve: 


714 


FORMS   AND    PRECEDENTS 


Form  162.    Dividend  Receipt 


o 
o 


$25.00  Boston,  Mass.,  October  i,  1917. 

Received  of  the  Howard  Foundation  Company  Twenty-Five 
Dollars,  payment  in  full  of  the  regular  quarterly  dividend  of  One 
and  One-half  Per  Cent  on  the  stock  of  said  corporation  standing 
in  my  name. 

Henry  J.  Pollock 


This  receipt  is  sent  out  with  the  dividend  check  to  be 
signed  and  returned  by  the  recipient.  When  payment  of 
dividends  is  made  at  the  office  of  the  company  or  at  the 
office  of  some  specified  trust  company  or  bank,  the  parties 
receiving  payment  usually  sign  the  dividend  register  and  no 
other  receipt  is  necessary. 

Receipts  for  instalment  payments  on  stock  are  given  in 
Forms  15-18. 

Corporate  Notes 

A  corporate  note  does  not  require  to  be  sealed.  It  may 
b)e  signed  by  any  officer  or  officers  properly  authorized  thereto. 
Such  authority  is  usually  conferred  by  by-law  provisions  or 
by  resolution  of  the  board  of  directors,  but  otherwise  may 
be  given  by  custom.  For  large  amounts  or  special  trans- 
actions outside  the  usual  routine,  the  officer's  authorization 
should  always  be  specific  and  usually  by  resolution  of  the 
board  of  directors.  In  all  such  cases  the  treasurer  should  have 
a  certified  copy  of  the  resolution. 

The  signature  of  a  corporate  note  should  always  be  the 
corporate  signature.  Any  other  signature  may  not  only  fail 
to  bind  the  corporation,  but  has  been  held  in  some  states  to 
involve  the  official  signing  the  note  in  a  personal  liability  as 
its  maker  or  indorser. 


CHECKS,   RECEIPTS,   AND   NOTES  715 

Form  163.    Corporate  Note — By  President 


$500.00  New  York,  October  i,  1917. 

Ninety  days  after  date  the  Hillman  Dredging  Company  promises  to 
pay  to  the  order  of  Howard  P.  Hunt  the  sum  of  Five  Hundred  Dollars. 
Value  Received. 

Hillman    Dredging    Company, 
By  Nathaniel  Potter, 

President 
Payable  at 

Seaboard  National  Bank, 
New  York 


Form  164.    Corporate  Note — By  Treasurer 


$2,500.00  Boston,  Mass.,  September  i,  1916. 

Four  months  after  date  the  Hanover  Securities  Company  promises 
to  pay  to  the  order  of  James  C.  Bennett  the  sum  of  Twenty-Five  Hun- 
dred Dollars,  with  interest  from  date  until  paid,  at  the  rate  of  Six  Per 
Cent  per  annum,  at  the  Sedgwick  National  Bank  of  Boston. 

Value  Received. 

Hanover  Securities  Company, 
No.  725  By  William  Curtiss, 

Due  January  i,  1917.  Treasurer 


The  preceding  notes  are  in  the  simplest  form.  The  cor- 
porate signature  is  affixed  by  one  officer  or  by  two  as  may  be 
customary  or  required  by  by-law  provision  or  directed  by  the 
board. 

Form  165.    Collateral  Note — On  Demand 

Collateral  Note 


$4,000.00  New  York,  N.  Y.,  October  3,  191 7. 

On  Demand  the  Hanover  Power  Company  promises  to  pay  to  the 
Seaboard  National  Bank  of  the  City  of  New  York,  or  order,  at  its  Bank- 
ing House,  No.  18  Broadway,  New  York,  N.  Y.,  Four  Thousand  Dollars 
for  value  received,  with  interest  at  the  rate  of  Six  Per  Cent  (6%)  per 
annum  from  the  date  hereof,  said  corporation  having  deposited  with  said 
Bank  as  collateral  security  for  payment  of  this  or  any  other  liability  or 


7i6 


FORMS   AND    PRECEDENTS 


liabilities  of  the  undersigned  to  said  Bank,  due  or  to  be  due  or  which  may 
be  hereafter  contracted  or  exist,  the  following  property  or  securities,  viz. : 
Sixty-five  (65)  Shares  of  the  Preferred  Stock  of  the  United  States  Steel 
Corporation  of  the  par  value  of  One  Hundred  Dollars  ($100)  each,  the 
certificate  for  said  stock  standing  in  the  name  of  John  H.  Howard,  Treas- 
urer of  the  said  Hanover  Power  Company,  and  being  indorsed  by  him  in 
blank  on  the  back  of  said  certificate. 

The  market  value  thereof  is  today  $7,085.00,  and  full  power  and 
authority  is  hereby  given  to  said  Bank  to  sell,  assign,  and  deliver  the  whole 
or  an}'-  part  thereof,  or  any  substitutes  therefor,  or  any  additions  thereto, 
at  any  Brokers'  Board,  or  at  public  or  private  sale,  at  the  option  of  said 
Bank  or  its  assigns  on  the  non-performance  of  this  promise  or  the  non- 
payment of  any  of  the  liabilities  above  mentioned,  or  at  any  time  or  times 
thereafter,  without  advertisement  or  notice,  which  are  hereby  expressly 
waived;  and  upon  such  sale  the  holder  hereof  may  purchase  the  whole  or 
any  part  of  such  securities  discharged  from  any  right  of  redemption,  and 
after  deducting  all  legal  or  other  costs  and  expenses  for  collection,  sale 
and  delivery,  shall  apply  the  residue  of  the  proceeds  of  such  sale  or  sales 
so  to  be  made  to  pay  any,  either,  or  all  of  said  liabilities  to  said  Bank 
or  its  assigns  as  said  Bank  or  its  assigns  shall  deem  proper,  return- 
ing the  overplus,  if  any,  to  the  undersigned.  And  the  undersigned  gives 
to  said  Bank  a  lien  to  secure  this  note  and  all  said  other  liabilities  now 
existing  or  hereafter  arising,  and  whether  at  any  time  due  or  not,  upon 
all  property  and  securities  of  the  undersigned  now  or  hereafter  deposited 
with  or  left  in  the  possession  of  said  Bank,  either  as  collateral  for  any 
other  obHgation  or  otherwise,  and  also  upon  any  balance  at  any  time  of 
the  deposit  account  of  the  undersigned  with  said  Bank.  Other  collaterals 
may  be  substituted  or  added  from  time  to  time  with  the  bank's  consent,  all 
representations,  conditions,  and  agreements  as  to  original  collaterals  ap- 
plying to  those  so  substituted  or  added. 

In    Witness    Whereof,    the   said    corporation    has    hereunto 
affixed  its  corporate  signature  and  seal,  acting  through  its 
President  and  Treasurer  duly  authorized  thereunto. 
J  CORPORATE  I  Hanover  Power  Company, 

\      SEAL      3  ^y  John   H.   Henderson, 

President 
Harry  F.  Sinclair, 

Treasurer 


Another  form  of  collateral  note  is  as  follows: 
Form  166.    Corporate  Note — Collateral  Security 

Collateral  Note 


$10,000.00  New  York,  October  i,  1917. 

Ninety  days  after  date  the  Berwick  Mercantile  Company  promises 
to  pay  to  the  order  of  the  Guardian  Trust  Company  of  New  York  City, 
at    No.    170   Broadway,    New    York    City,    the    sum    of   Ten    Thousand 


CHECKS,   RECEIPTS,   AND   NOTES  717 

Dollars,  with  interest  from  date  until  paid  at  the  rate  of  Five  Per  Cent 
(5%)  per  annum,  and  the  said  Berwick  Mercantile  Company  doth  here- 
with deposit  with  the  Guardian  Trust  Company  as  collateral  security  for 
the  due  payment  of  the  foregoing  promissory  note,  Two  Hundred  (200) 
Shares  of  its  stock  in  one  Certificate  No.  325,  said  Certificate  standing 
in  the  name  of  Mark  Baldwin,  Treasurer  of  the  said  Berwick  Mercantile 
Company,  and  indorsed  by  him  in  blank. 

And  in  the  event  that  this  note  or  the  interest  thereon  shall  not  be 
paid  when  due,  the  said  Berwick  Mercantile  Company  hereby  appoints 
and  constitutes  the  said  Guardian  Trust  Company  its  attorney  in  fact  and 
irrevocably,  with  power  of  substitution,  to  sell  at  any  time  after  this  said 
note  or  any  interest  thereon  is  due  and  unpaid,  with  or  without  notice, 
and  either  at  public  or  private  sale,  the  whole  or  any  part  of  said  securi- 
ties, the  proceeds  thereof  to  be  applied  to  the  payment  of  the  said  prom- 
issory note,  any  interest  due  thereon,  and  any  commissions  properly  pay- 
able on  the  sales  of  said  securities  so  sold,  and  any  surplus  remaining 
thereafter,  either  of  cash  or  of  the  said  securities  to  belong  to  and  be 
subject  to  the  order  of  the  said  Berwick  Mercantile  Company;  and  should 
said  securities  not  bring  the  full  amount  of  this  present  note,  together 
with  any  interest  accrued  thereon,  said  Berwick  Mercantile  Company 
undertakes  and  agrees  to  pay  the  amount  still  due  to  the  holder  hereof 
on  demand. 

Should  any  such  sale  be  made,  the  holder  hereof  shall  directly  or  in 
the  name  of  any  other  person,  have  the  right  to  purchase  the  security 
aforesaid.  In  case  the  market  value  of  the  same  shall  decrease,  the  said 
Berwick  Mercantile  Company  hereby  promises  and  agrees  to  proportion- 
ately reduce  the  amount  of  its  indebtedness  hereunder,  or  otherwise  in- 
crease the  security  in  proportion  to  said  decrease  of  value. 

In  Witness  Whereof,  the  said  Berwick  Mercantile  Company 
has  caused  its  name  to  be  subscribed  hereunto  by  its 
President,  and  its  duly  attested  seal  to  be  affixed  hereto 
by  its  Secretary,  on  the  day  and  year  first  above  written. 
corporate]  Berwick   Mercantile  Company, 

By  Henry  S.  Corbin, 

President 


I  CORPORATE  7 
(        SEAL        3 


Attest  seal : 

Amos  C.  Hallock, 

Secretary 


When  the  corporate  officials  are  not  expressly  authorized 
to  execute  notes  by  due  resolution  deposited  with  the  bank 
in  whose  favor  the  notes  are  drawn,  a  certified  resolution  evi- 
dencing their  authority  is  usually  required. 


CHAPTER   LXXXII 

CERTIFICATIONS 

The  certifications  so  frequently  required  in  corporate 
procedure  are  never  made  in  the  corporate  name.  Certificates 
and  affidavits  to  corporate  instruments  are  made  over  their 
own  names  by  the  oflficers  directly  interested  or  concerned. 
Acknowledgments  are  made  for  and  on  behalf  of  the  cor- 
poration— but  not  in  its  name — ^by  such  corporate  officials  or 
agents  as  may  be  prescribed  by  statute  or  be  authorized  there- 
to by  the  by-laws  or  resolutions  of  the  board. 

Form  167.     Certificate  to  Service  of  Notice 


I,  the  undersigned,  Secretary  of  the  Atlantic  Machine  Works,  do 
hereby  certify  that  in  accordance  with  the  by-law  requirements  of  said 
Company,  a  copy  of  the  foregoing  notice,  properly  enclosed  and  directed, 
and  with  postage  prepaid,  was  by  me  on  the  3rd  day  of  October,  1917, 
mailed  to  each  stockholder  of  record  of  said  Company  at  his  address  as 
it  appeared  on  the  books  of  the  Company. 

Henry  H.  Linden 
New  York  City, 

October  15,  1917. 


This  certificate  usually  appears  on  the  same  sheet  with, 
and  below  a  copy  of,  the  notice,  though  sometimes  written 
separately  and  attached  to  a  copy  of  the  notice.  In  this  latter 
case  the  wording  of  the  certificate  must  be  changed  to  corre- 
spond with  the  facts. 

An  affidavit,  as  in  the  case  of  the  certification,  may  appear 
on  the  same  sheet  as  the  copy  of  the  notice,  or  be  attached 
thereto. 

718 


CERTIFICATIONS  -rj^ 


Form  1 68.    Affidavit  to  Service  of  Notice 


State  of  New  York       1 
County  of  New  York) 

On  this  15th  day  of  October,  1917,  before  me  personally  appeared 
Henry  H.  Linden,  Secretary  of  the  Atlantic  Machine  Works,  who  being 
duly  sworn,  did  depose  and  say  that  on  the  3rd  day  of  October,  1917,  a 
copy  of  the  attached  notice  of  meeting,  properly  enclosed  and  directed 
and  with  postage  prepaid,  was  by  him  mailed  to  each  stockholder  of  record 
of  said  corporation  at  his  address  as  shown  by  the  books  of  the  Company. 

Henry  H.  Linden 
Sworn  to  and  subscribed  before  me 

the  day  and  year  aforesaid. 

John  H.  Anderson, 
J  corporate  I  Notary  Public 

\      SEAL      3  County  of  New  York, 

No.  16 


The  best  evidence  of  notice  by  publication  is  furnished 
by  complete  copies  of  the  papers  in  which  the  notice  appeared. 
When  these  are  supplied,  no  certification  as  to  publication  of 
the  notice  is  usually  required.  If,  however,  the  notice  is 
clipped  from  the  paper  and  so  preserved,  an  affidavit  is  some- 
times considered  desirable.  The  larger  city  papers  furnish 
affidavits  on  request  for  notices  published  in  their  columns. 

Form  169.    Affidavit  to  Publication  of  Notice  by  Secretary 

Affidavit 


State  of  New  York      7 
County  of  New  York} 

On  this  15th  day  of  October,  1917,  before  me  personally  appeared 
Henry  H.  Linden,  Secretary  of  the  Atlantic  Machine  Works,  who  being 
duly  sworn,  did  depose  and  say  that  the  annexed  notice  was  published  in 
the  New  York  Times  on  the  3rd  and  loth  days  of  October,  1917. 

Henry  H.  Linden 
Sworn  to  and  subscribed  before  me 
the  day  and  year  aforesaid. 

John  H.  Anderson, 
y  notarial  )  Notary  Public 

7      seal      \  County  of  New  York, 

No.  16 


720  FORMS   AND    PRECEDENTS 

In  the  following  form  of  certified  resolution  the  reso- 
lution appears  on  the  upper  part  of  the  sheet  followed  by 
the  certification,  the  general  arrangement  being  the  same  as 
in  Form  175: 

Form  170.    Certified  Resolution  Designating  Bank 

(For  Resolution   see  Form  87.) 


I,  Sherman  H.  Rogers,  Secretary  of  the  Allis  Drug  Company,  do 
hereby  certify  that  the  foregoing  is  a  full  and  true  transcript  of  a  resolu- 
tion duly  adopted  at  a  regular  meeting  of  the  Board  of  Directors  of  the 
said  Company  held  in  the  City  of  New  York  on  the  loth  day  of  Novem- 
ber, 1917,  as  it  appears  on  the  minutes  of  said  meeting,  and  I  do  further 
certify  that  Charles  Allis  is  the  duly  elected  President  of  said  Company, 
and  Jasper  T.  Huntington  is  its  duly  elected  Treasurer. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  official 
signature  and  the  corporate  seal  of  said  Company,  this 
25th  day  of  November,  1917, 

Sherman  H.  Rogers, 
I  CORPORATE  7  Secretary 

\      SEAL      3 


The  following  certification  is  employed  in  connection  with 
the  resolution  given  in  Form  88 : 

Form  171.    Certification  of  Resolution  Designating  Bank 


I,  John  H.  Farwell,  Assistant  Secretary  of  the  Standard  Milling 
Company,  do  hereby  certify  that  the  foregoing  resolution  was  duly  adopted 
at  a  regular  meeting  of  the  Board  of  Directors  of  said  Company  held  on 
Tuesday,  November  10,  191 7,  in  the  office  of  the  Company,  225  Fifth 
Avenue,  New  York,  all  as  shown  by  the  minutes  of  said  meeting,  and  that 
the  transcript  of  Section  3,  Article  VII  of  the  By-laws  of  said  Company 
appearing  in  the  preamble  of  said  resolution  is  a  true  and  accurate  trans- 
cript thereof  from  the  duly  adopted  By-laws  of  the  Company,  and  I  do 
further  certify  that  Henry  F.  Farrand  is  the  duly  elected  Treasurer  of 
said  Company  and  Howard  C.  Malcolm  is  its  duly  elected  President. 

Witness  my  official   signature  and  the  corporate  seal   of   said 
Company,  this  i8th  day  of  November,  1917. 

John  H.  Farwell, 
^corporate)  Assistant  Secretary 

\        SEAL        ) 


CERTIFICATIONS  721 

If  the  bank  requires  certified  signatures  of  the  signing 
officials,  these  signatures  might  be  written  on  the  same  sheet 
between  the  resolution  and  certification,  and  the  following 
phrase  be  added  to  the  certification:  "and  that  the  signatures 
above  written  are  respectively  the  signatures  of  the  said  Henry 
F.  Farrand  and  Howard  C.  Malcolm." 

A  different  form  of  certification  employed  in  connection 
with  the  resolution  of  Form  89  is  as  follows: 

Form  172.    Certification  of  Resolution 


The  undersigned,  Secretary  of  the  American  Textile  Company,  does 
hereby  certify  that  the  foregoing  resolution  was  duly  adopted  on  the  loth 
day  of  December,  1917,  at  a  meeting  of  the  Board  of  Directors  of  said 
Company  regularly  called  and  duly  constituted  and  at  which  a  quorum  was 
present. 

Witness  my  hand  and  the  seal  of  said  corporation  this  12th 
day  of  December,  1917. 

Alfred  Dil worth, 
C  CORPORATE )         ,  Secretary 

\      SEAL      3 


Form  173.    Certificate  of  Election  of  Treasurer 


I,  Horace  B.  Elkins,  Secretary  of  the  Ellwood  Creamery  Company, 
hereby  certify  that  at  a  regular  and  duly  constituted  meeting  of  the  Board 
of  Directors  of  said  Company  held  in  the  City  of  Albany  on  the  ist  day 
of  December,  1917,  Henry  Howells  was  elected  Treasurer  of  said  Com- 
pany to  fill  the  vacancy  in  said  office  caused  by  the  death  of  J.  J.  Mc- 
Allen,  and  that  the  said  Henry  Howells  is  now  the  duly  qualified  and 
authorized  Treasurer  of  the  said  Ellwood   Creamery  Company. 

Witness  my  hand  and  the  seal  of  the  Company  this  loth  day 
of  December,  1917. 

Horace  B.  Elkins, 
J  corporate  )  Secretary 

\      seal      ) 


The  following  certificate  of  the  election  of  corporate  of- 
ficials may  be  used  when  greater  formality  is  desired. 


^22.  FORMS   AND    PRECEDENTS 

Form  174.    Certificate  of  Election  of  Officers 


I,  Emory  Hardin,  Secretary  of  the  Dyett-King  Leather  Company,  do 
hereby  certify  that  the  directors  of  said  Company  being  duly  assemliled 
in  lawful  meeting  in  the  office  of  the  Company,  No.  75  Dey  St.,  New 
York  City,  on  the  9th  day  of  November,  1917,  and  a  quorum  being  pres- 
ent, did  then  and  there  elect  Frederick  Myers  President,  and  Walter  C. 
Jackson  Treasurer  of  said  corporation,  to  serve  for  the  ensuing  year  and 
until  the  due  election  and  qualification  of  their  successors,  and  that  Fred- 
erick Myers  and  Walter  C.  Jackson  are  now  duly  and  fully  qualified^  and 
empowered  to  act  for  said  corporation  in  their  respective  official  capacities. 
In  Testimony  Whereof,  I  have  hereunto  affixed  my  official 
signature    and   the   corporate   seal   of    said   Company   this 
15th  day  of  November,  1917. 

Emory  Hardin, 
C  CORPORATE  7  Secretary 

\        SEAL        3 


Forms  for  certifications  of  transcripts  are  given  below: 
Form  175.    Certification  of  Transcript  from  By-Laws 
CONSOLIDATED  CRACKER  COMPANY 


Transcript  from  By-Laws 


"Article  IV — Officers 
"Sec.  2.     The  President 

"The  President  when  present  shall  preside  at  all  meetings  of  the 
stockholders  and  of  the  Board  of  Directors;  shall  sign  all  certificates  of 
stock;  shall  sign  or  countersign  as  may  be  necessary  all  such  bills,  notes, 
checks,  drafts,  and  other  instruments  as  may  pertain  to  the  ordinary  course 
of  the  Company's  business,  and  shall  sign  when  duly  authorized  thereto  all 
contracts,  orders,  deeds,  licenses,  and  other  instruments  of  a  special  nature. 

"He  may  also  in  the  absence  or  disability  of  the  Treasurer,  indorse 
checks,  drafts,  and  other  negotiable  instruments  for  deposit  or  collection, 
and  shall  with  the  Secretary  sign  the  minutes  of  all  meetings  over  which 
he  presides." 


I,  James  T.  Howard,  Secretary  of  the  Consolidated  Cracker  Com- 
pany, do  hereby  certify  that  the  above  is  a  true  and  correct  copy  of  Sec- 
tion 2,  Article  IV  of  the  duly  adopted  by-laws  of  this  Company,  and  in 
testimony  thereof  I  have  hereunto  affixed  my  official  signature  and  the 
seal  of  the  Company,  in  the  City  of  Brooklyn,  on  this  21st  day  of  Novem- 
ber, 1917. 

James  T.  Howard, 
f  CORPORATE  I  Secretary 

\        SEAL        3 


CERTIFICATIONS  ^23 

Form  176.    Certification  of  Transcript  from  Minutes 

WESTON  MANUFACTURING  CORPORATION 


Transcript  from   Minutes  of 

Regular  Meeting  of  Directors 

Held   September  15,   1917 


(Transcript  from  minutes  appears  here.) 


I,  the  undersigned,  Secretary  of  the  Weston  Manufacturing  Corpora- 
tion, do  hereby  certify  that  the  above  and  foregoing  is  a  true  and  accurate 
transcript  from  the  minutes  of  a  regular  meeting  of  the  Board  of  Direc- 
tors of  said  Company  held  in  the  office  of  the  Company  on  the  15th  day 
of  September,  1917,  and  recorded  on  pages  85  to  87  of  the  Minute  Book 
of  said  Company. 

Witness  my  hand  and  seal  of  the  Company  this  14th  day  of 
November,  1917, 

Horace  Potter, 
J  corporate  ]  Secretary 

\        SEAL        I 

The  president  occasionally  joins  with  the  secretary  in 
the  certification  of  any  specially  important  transcript.  In  such 
case  the  certificate  is  changed  as  follows: 

Form  177.    Certification  of  Minutes — ^President  and  Secretary 

We,  the  undersigned.  President  and  Secretary  respectively  of  the 
Weston  Manufacturing  Corporation,  do  hereby  certify  that  the  above  and 
foregoing  is  a  true  and  accurate  transcript  from  the  minutes  of  a  regular 
meeting  of  the  Board  of  Directors  of  said  Company  held  in  the  office  of 
the  Company  on  the  iSth  day  of  September,  1917,  and  recorded  on  pages 
85  to  87  of'  the  Minute  Book  of  said  Company. 

In  Witness  Whereof,  we  have  hereunto  affixed  our  official 
signatures  and  the  seal  of  the  Company  in  the  City  of 
New  York  on  this  14th  day  of  November,  1917. 

Henry  J.  Randall, 
J  CORPORATE  \  President 

\      SEAL      j  Horace  Potter, 

Secretary 


Affidavits  take  the  place  of  the  secretary's  certificate  when 
corporate  records  or  transcripts  therefrom  are  required  for 
use  in  legal  proceedings. 


724  FORMS   AND    PRECEDENTS 

Form  178.    Secretary's  Affidavit  to  Minutes 

State  of  New  York     ) 
County  of  New  YorkJ"^"^'* 

On  this  14th  day  of  November,  191 7,  before  me  personally  appeared 
Horace  Potter,  who  being  duly  sworn,  did  depose  and  say  that  he  is  the 
Secretary  of  the  Weston  Manufacturing  Corporation ;  that  he  was  present 
at  the  regular  meeting  of  the  Directors  of  that  Company  held  on  the  15th 
day  of  September,  1917,  that  he  recorded  the  proceedings  of  said  meeting 
in  the  Minute  Book  of  the  corporation,  and  that  the  above  and  forego- 
ing is  a  true  and  correct  transcript  from  the  minutes  so  recorded. 

Horace  Potter 
Sworn  to  and  subscribed  before  me 
on  the  day  and  year  above  stated, 

(Notarial  signature  and  seal.) 

Notarial  exemplifications  of  certified  transcripts  from  the 
corporate  records  are  sometimes  required  as  illustrated  by  the 
following  form. 

Form  179.    Notarial  Exemplification  of  Minutes 

State  of  New  York       |     . 
County  of  New  York  j     * 

Personally  appeared  before  me  this  20th  day  of  November,  1917, 
Horace  Potter,  to  me  well  known,  and  acknowledged  that  he  signed  the 
foregoing  certification  of  a  transcript  from  the  minutes  of  the  Weston 
Manufacturing  Corporation,  and  affixed  the  seal  of  said  Company  thereto 
as  Secretary  of  the  said  Company  for  the  purposes  therein  set  forth,  and 
I  have  personally  examined  the  minutes  of  said  Company  under  date  of 
September  15,  1917,  and  certify  that  the  foregoing  transcript  is  correctly 
transcribed  therefrom. 

Morris   Manning, 
I  notarial  7  Notary  Public  for 

\     seal      3  Counts;  of  New  York, 

No.  765 
Term  expires  December  i,  1918. 


The  treasurer's  certifications  to  matters  relating  to  the 
corporation's  finances  are  usually  in  the  form  of  affidavits. 
The  affidavit  should  follow  the  statement  on  the  same  sheet 
or  on  the  last  sheet  if  the  statement  extends  over  several 
pages. 


CERTIFICATIONS  >725 

Form  1 80.    Treasurer's  Affidavit  to  Corporate  Statement 

State  of  New  York    1  ..  . 
County  of  New  York  j       ' 

On  this  19th  day  of  October,  1917,  personally  appeared  before  me,  a 
Notary  Public  in  and  for  the  County  of  New  York,  Walter  L.  Hood, 
Treasurer  of  the  Hood  Scale  Company,  who,  being  duly  sworn,  did  de- 
pose and  say  that  he  has  full  charge  and  control  of  the  books  and 
accounts  of  the  said  Company;  that  the  above  and  foregoing  statement  is 
taken  from  said  books  and  accounts ;  that  it  is  a  true  and  accurate  trans- 
cript therefrom,  and  that  to  the  best  of  his  knowledge  and  belief  it  is  a 
just  and  correct  presentation  of  the  financial  condition  of  said  Company 
on  this  date. 

Walter  L.  Hood 
Sworn  to  before  me  the 

day  and  year  aforesaid. 

James  H.  Steele, 
S  NOTARIAL  I  Notary  Public  for 

I      SEAL      3 New  York  County, 

No.  994 
Term  expires  Feb.   15,   1919. 

When  the  corporate  acknowledgments  are  taken,  the  notary 
should  not  be  an  officer  or  stockholder  of  the  corporation. 
The  form  of  acknowledgment  is  usually  regulated  by  statute 
and  therefore  varies  in  almost  every  state  of  the  Union.  The 
following  form  of  corporate  acknowledgment  is  that  pre- 
scribed by  the  statutes  of  New  York. 

Form  181.    Notarial  Acknowledgment — New  York 

State  of  New  York       )  ^^  • 
County  of  New  York  |      * 

On  this  i6th  day  of  November  In  the  year  1917  before  me  personally 
came  John  J.  Kerry,  to  me  known,  who,  being  by  me  duly  sworn,  did 
depose  and  say  that  he  resided  in  the  City  of  New  York;  that  he  is  the 
President  of  the  Kerry  Machine  Works,  the  corporation  describ'ed  in  and 
which  executed  the  above  instrument;  that  he  knew  the  seal  of  said 
corporation ;  that  the  seal  affixed  to  said  instrument  was  such  corporate 
seal;  that  it  was  so  affixed  by  order  of  the  Board  of  Directors  of  said 
corporation,  and  that  he  signed  his  name  thereto  by  like  order. 

John  J.  Kerry 
Sworn  to  before  me  the 

day  and  year  aforesaid. 

(Notarial  signature  and  seal) 


CHAPTER    LXXXIII 

POWERS   OF  ATTORNEY,   CONTRACTS,  AND 
ASSIGNMENTS 

Powers  of  Attorney 

The  execution  of  a  power  of  attorney  varies  according 
to  the  powers  conveyed  and  the  conditions  under  which  it 
is  given.  The  instrument  which  follows  does  not  require 
acknowledgment  when  the  parties  are  known  to  the  corporate 
officials.  If  otherwise  acknowledgment  Is  usually  required. 
(See  Forms  131,  132.) 

Form  182.     Power  of  Attorney — To  Receive  Dividends 

Power  of  Attorney 


I,  the  undersigned,  do  hereby  constitute  and  appoint  George  H. 
Williams  of  New  York  City,  my  true  and  lawful  attorney,  for  me  and  in 
my  place  and  stead  to  receive  any  and  all  dividends  that  may  be  declared 
upon  Fifty  Shares  of  Preferred  Stock  of  the  Howard  Bank  Note  Com- 
pany now  standing  in  my  name  on  the  books  of  said  Company,  and  to 
receipt  for  the  same,  and  to  do  all  other  things  that  may  be  necessary 
to  carry  into  effect  the  intent  of  this  power  of  attorney;  and  I  hereby 
ratify  and  confirm  all  that  my  said  attorney  may  properly  do  by  virtue  of 
the  authority  herein  conferred. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  signature 
and  seal  this  7th  day  of  December,  191 7. 

George  H.  Lane  [l.  s.] 

Witnessed  by 

Howard  Lansing 


A  corporate  power  of  attorney  differs  from  the  ordinary 
form  only  in  those  details  directly  incident  to  its  corporate 
origin. 

726 


POWERS    OF   ATTORNEY  ^27 

Form  183.    Power  of  Attorney — To  Collect  Money 

Power  of  Attorney 


Know  All  Men  by  These  Presents  : 

That  the  Tucson  Cattle  Company,  a  corporation  duly  organized  under 
the  laws  of  Arizona,  does  hereby  make,  constitute,  and  appoint  Howard 
H.  McComb  of  the  State  of  New  York,  its  true  and  lawful  attorney,  for 
it  and  in  its  name,  place,  and  stead  to  collect  and  receive  from  the  New 
York  Drovers'  Association  of  New  York  City  the  sum  of  Three  Thousand 
Dollars  ($3,000)  with  interest  thereon  at  the  legal  rate  from  the  ist  day 
of  January,  1917,  said  amount  being  due  and  payable  to  the  Tucson  Cattle 
Company  for  and  on  account  of  cattle  shipped  the  said  New  York  Drovers' 
Association  during  the  month  of    December,  1916,  and  the  said  Howard 
H.  McComb  is  hereby  fully  authorized  and  empowered  for  and  on  account 
of  the  said  Tucson  Cattle  Company  and  in  its  name,  to  collect,  receive, 
and   receipt    for   the    said    Three    Thousand    Dollars    ($3,000),    and    the 
interest  thereon  as  aforesaid,  in  whole  or  in  part,  but  without  prejudice 
to  any  portion  thereof  unpaid,  and  to  incur  and  pay  on  behalf  of  the  said 
Tucson  Cattle  Company  all  reasonable  expenses  incident  to  the  collection 
of  said  amount,  including  all  proper  costs  of  any  suit  or  other  legal  pro- 
ceedings necessary  thereto,  and  generally  to  do  all  such  other  things  in 
connection  therewith  as  may  be  necessary  and  proper  in  the  premises. 
In  Witness  Whereof,  the  said  Tucson  Cattle  Company  has 
caused  its  corporate  name  to  be  signed  hereunto  by  its 
President  and  its  corporate  seal  to  be  affixed  and  attested 
by  its  Secretary,  all  being  done  in  the  City  of  Tucson, 
Arizona,  on  this  the  2nd  day  of  July,  191 7. 
(  corporate  )  Tucson  Cattle  Company, 

I      seal      3  By  George  M.  Price, 

President 
Attest  Seal: 

Wilson  M.  Burney, 
Secretary 


The  foregoing  power  of  attorney  would  usually  be  ac- 
knowledged in  order  to  give  it  greater  weight  and  more 
ready  recognition. 

Form  184.    Power  of  Attorney — To  Make  Delivery  of  Deed 

Power  of  Attorney 


Know  All  Men  by  These  Presents: 

That  the  Albany  Flouring  Mills,  a  corporation  duly  organized  under 
the  laws  of  the  State  of  New  York,  and  having  its  principal  office  and 


^28  FORMS   AND    PRECEDENTS 

place  of  business  in  Albany,  New  York,  has  made,  constituted,  and  ap- 
pointed and  by  these  presents  does  make,  constitute,  and  appoint,  George 
H.  McCall  of  Philadelphia,  Pennsylvania,  its  true  and  lawful  attorney,  for 
it  and  its  name  and  stead,  to  deliver  to  the  Adams  Foundation  Company 
of  Philadelphia,  Pennsylvania,  a  certain  deed  duly  executed  by  the  said 
Albany  Flouring  Mills  and  transferring  to  the  said  Adams  Foundation 
Company  the  property  therein  described  at  Nos.  1534,  1536,  and  1538 
West  Side  Avenue,  Philadelphia,  and  to  receive  payment  for  the  property 
transferred  by  said  deed,  and  the  said  George  H.  McCall  is  hereby  fully 
authorized  and  empowered  for  and  on  behalf  of  this  Company  to  make 
good  and  valid  delivery  of  the  said  deed  and  to  receive  from  the  said 
Adams  Foundation  Company  the  sum  of  Nineteen  Thousand,  Two  Hun- 
dred and  Fifty  Dollars  ($19,250)  in  cash,  payment  for  the  property  trans- 
ferred by  said  deed,  and  to  receipt  for  said  payment,  and  to  do  all  such 
other  things  as  may  be  necessary  and  proper  in  the  premises. 

In  Witness  Whereof,  the  said  Albany  Flouring  Mills  has 
caused  its  corporate  seal  to  be  affixed  hereunto  by  its 
Secretary  and  its  name  to  be  subscribed  hereto  by  its 
President,  all  being  done  in  the  City  of  Albany,  and  State 
of  New  York,  on  this  first  day  of  June,  1917. 
f  CORPORATE  7  .  Albany  Flouring  Mills, 

(      seal      j  By  Jesse  H.  Blanchard, 

President 
Attest  Seal : 

Julian  Hurndon, 
Secretary 


A  power  of  attorney  should  either  be  accompanied  by  a 
certified  copy  of  the  resolution  by  which  it  was  authorized, 
or  otherwise  be  acknowledged. 

The  power  of  attorney  which  follows  authorizes  the  sale 
of  land  and  the  execution  and  delivery  of  the  deeds,  and  there- 
fore requires  the  same  formal  execution  as  a  deed.  Without 
this  it  is  ineffective.  The  form  of  execution  must  comply 
with  the  law  of  the  state  in  which  the  land  is  located. 

Form  185.    Power  of  Attorney — To  Manage,  Sell,  and  Deed 
Land 

Power  of  Attorney 


Know  All  Men  by  These  Presents: 

That  the  Berwell  Investment  Company,  a  corporation  duly  organized 
and  existing  under  and  by  virtue  of  the  laws  of  the  State  of  New  York, 


POWERS    OF  ATTORNEY  ^29 

and  having  its  office  and  principal  place  of  business  at  No.  30  Broad  Street, 
in  the  City  of  New  York,  has  made,  constituted,  and  appointed,  and  by 
these  presents  does  make,  constitute,  and  appoint,  Horace  M.  Maxwell  of 
Houston,  Texas,  its  true  and  lawful  attorney,  for  it  and  in  its  name, 
place,  and  stead  to  bond,  grant,  bargain,  sell,  contract,  lease,  exchange, 
give  options  on,  sell  timber  from,  sell  or  lease  oil,  coal  or  other  mineral 
rights  in  or  on,  or  handle  or  dispose  of  in  such  other  way  as  may  by  him 
be  deemed  advantageous  and  advisable,  and  for  such  consideration  and 
on  such  terms  as  he  may  approve,  and  in  whole  or  in  part,  that  certaiir 
tract  or  parcel  of  land,  owned  by  said  Berwell  Investment  Company,  in 
Brazos  County,  Texas,  consisting  of  the  east  half  of  the  league  of  land 
known  as  the  J.  J.  Oliver  League,  and  containing  Two  Thousand  Two 
Hundred  and  Fourteen  Acres  (2,214),  more  or  less,  said  land  being  part 
of  the  Headright  granted  to  J.  J.  Oliver  by  the  Mexican  Government  and 
surveyed  by  the  County  Surveyor  in  1838,  and  conveyed  to  the  Berwell 
Investment  Company  by  deed  from  the  said  J.  J.  Oliver,  dated  July  i, 
1856,  and  recorded  in  the  office  of  the  County  Clerk  of  Brazos  County, 
D.  B,  15,  page  225 ;  and  the  said  Berwell  Investment  Company  grants  to 
its  said  attorney  full  power  and  authority  to  collect  and  receive  for  said 
Company  all  rents,  royalties,  and  other  considerations  or  payments  de- 
rived from  the  said  property  in  any  way;  and  for  the  said  Berwell  In- 
vestment Company  and  in  its  name  and  stead,  either  alone  or  jointly  with 
others,  as  may  be  requisite  and  necessary,  to  make,  execute,  acknowledge, 
and  deliver  good  and  sufficient  deeds,  conveyances,  option  contracts  or 
leases  for  the  said  property,  or  for  any  parts  thereof,  or  for  any  rights 
therein  or  thereon,  giving  and  granting  its  said  attorney  full  power  and 
authority  to  do  and  perform  any  and  every  act  and  thing  whatsoever 
requisite  and  necessary  to  be  done  in  the  premises,  the  said  Company 
hereby  ratifying  and  confirming  all  that  its  said  attorney  shall  lawfully 
do  or  cause  to  be  done  by  virtue  of  this  present  indenture. 

In  Witness  Whereof,  the  said  Berwell  Investment  Company 
has  caused  its  corporate  name  to  be  signed  by  its  Presi- 
dent and  its  corporate  seal  to  be  affixed  by  its  Secretary, 
all  being  done  in  the  City  of  New  York  on  this  the  iSth 
day  of  August,  191 7. 
f  CORPORATE )  Berwell  Investment  Company, 

(      SEAL      3  By  James  Warren, 

President 
Attest  Seal: 

Willis  Baker, 

Secretary 


This  instrument  is  sweeping,  giving  the  agent  practically 
every  power  over  the  lands  affected  that  the  company  has 
itself.  The  acknowledgment  must  in  this  case  follow  the 
Texas  form. 

When  a  corporate  power  of  attorney  is  given  for  some 
special  act,  it  expires  automatically  as  soon  as  that  act  is 


730  FORMS   AND    PRECEDENTS 

performed.  When,  however,  it  is  desired  to  terminate  the 
powers  prior  thereto,  or  where  the  power  is  a  continuing  one^ 
a  formal  revocation  is  necessary.  Notice  of  this  revocation 
should  be  sent  to  the  parties  directly  interested,  and,  in  case 
of  a  general  power  of  attorney,  should  also  be  published. 

Form  i86.    Revocation  of  Power  of  Attorney 

Know  All  Men  by  These  Presents: 

That  the  Berwell  Investment  Company,  a  corporation  duly  organized 
and  existing  under  and  by  virtue  of  the  laws  of  the  State  of  New  York, 
and  having  its  office  and  principal  place  of  business  at  No.  30  Broad 
Street  in  the  City  of  New  York,  has  for  good  cause  and  consideration 
revoked,  recalled,  annulled,  and  made  void,  and  by  these  presents  does 
revoke,  recall,  annul,  and  make  void  a  certain  power  of  attorney  given 
under  date  of  August  18,  191 7,  under  the  corporate  signature  and  seal, 
to  Horace  M.  Maxwell  of  Houston,  Texas,  and  does  hereby  withdraw, 
deny,  and  cancel  any  and  all  powers  and  authorities  whatsoever  therein 
expressed  and  conveyed. 

In  Witness  Whereof,  the  said  Berwell  Investment  Company 
has  caused  its  corporate  signature  and  seal  to  be  here- 
unto affixed  by  its  President  and  Secretary  in  the  City 
of  New  York  on  this  19th  day  of  September,  1917. 
I  CORPORATE  )  Berwell  Investment  Company, 

(      SEAL      3  By  James  Warren, 

President 
Willis  Baker, 

Secretary 


Corporate  Contracts 

Corporate  contracts  differ  in  nowise  from  contracts  be- 
tween individuals,  save  in  the  verbiage  necessary  to  adapt 
them  to  the  corporate  form.  The  forms  which  follow  are  in- 
cluded merely  to  illustrate  this  adaptation. 

Form  187.    Corporate  Contract 

Contract 


An  Agreement,  made  and  entered  into  this  25th  day  of  November, 
A.  D.  191 7,  by  and  between  the  Atlas  Lithographing  Company,  a  corpora- 


CORPORATE   CONTRACTS  73 1 

tion  duly  organized  under  the  laws  of  the  State  of  Maine  and  having  its 
usual  place  of  business  in  Boston,  Massachusetts,  party  of  the  first  part, 
and  the  Selby  Lithographing  Company,  a  corporation  organized  under  the 
laws  of  the  State  of  New  York,  and  having  its  principal  office  and  place 
of  business  at  No.  20  Broad  Street  in  the  City  of  New  York,  party  of 
the  second  part. 

For  and  in  consideration  of  the  sum  of  One  Dollar  and  of  other 
valuable  considerations  passing  between  the  parties  hereto,  the  receipt 
whereof  is  hereby  respectively  acknowledged,  it  is  agreed  as  follows : 

1.  That  the  said  party  of  the  first  part  shall  employ  one  John  H. 
Bernard  of  Boston,  Massachusetts,  for  account  of  both  the  parties  here- 
unto, to  work  upon  and  perfect  as  far  as  may  be,  a  certain  improvement 
in  lithography  known  as  the  "Silver  Plate  Process,"  said  process  being 
now  the  joint  property  of  the  said  parties  to  this  present  agreement. 

2.  That  said  party  of  the  first  part  shall  pay  the  said  John  H. 
Bernard  a  monthly  salary  not  exceeding  Three  Hundred  Dollars  ($300) 
and  shall  also  furnish  such  materials,  supplies,  and  assistance  as  the  said 
John  H.  Bernard  may  reasonably  require  in  the  progress  of  his  work. 

3.  That  at  the  end  of  each  quarter  said  party  of  the  first  part  shall 
render  a  statement  of  the  expenses  incurred  by  reason  of  the  employment 
of  the  said  John  H.  Bernard  for  the  perfection  of  the  said  Silver  Plate 
Process,  and  said  party  of  the  second  part  shall  within  ten  days  of  the 
receipt  of  said  statement  remit  one-half  thereof  to  the  said  party  of  the 
first  part. 

4.  That  all  improvements  in  said  Silver  Plate  Process  or  in  con- 
nection therewith  that  may  be  made  or  discovered  by  the  said  John  H. 
Bernard,  shall  be  the  joint  and  equal  property  of  the  two  parties  to  this 
present  agreement,  and  patents  therefor  shall  be  taken  out  in  the  names 
of  the  said  parties  of  this  present  agreement  and  at  their  joint  expense. 

5.  That  said  employment  of  said  John  H.  Bernard  shall  continue 
for  one  year  from  date,  unless  sooner  terminated  by  mutual  agreement 
or  by  circumstances  beyond  the  control  of  the  parties  hereto. 

(Testimonium  and  signatures  as  in  Form  148.) 


This  agreement  might  or  might  not  be  acknowledged  at 
the  discretion  of  the  parties.  The  contract  as  executed  is 
legally  sufficient.  The  only  advantage  to  be  gained  by  an 
acknowledgment  is  the  greater  ease  of  proving  the  authen- 
ticity and  due  execution  of  the  instrument  in  case  of  litigation. 

Form  188.    Corporate  Bill  of  Sale 

Bill  of  Sale 


Know  All  Men  by  These  Presents  : 

That  the   Standard   Laundry   Machine   Company,   a  corporation   duly 
organized  under  the  laws  of  the  State  of  New  York,  with  its  principal 


732 


FORMS   AND   PRECEDENTS 


office  and  place  of  business  at  No.  50  Dey  St.,  in  the  City  of  New  York, 
in  consideration  of  the  sum  of  One  Thousand  Dollars  to  it  paid  by  the 
Clipper  Laundry  Company  of  No.  71  East  21st  St.,  New  York  City,  the 
receipt  whereof  is  hereby  acknowledged,  does  hereby  sell,  transfer,  and 
assign  to  the  said  Clipper  Laundry  Company  the  following  goods  and 
chattels,  viz.: 

All  of  the  laundry  machinery,  tools,  and  apparatus  of  every  kind  now 
in  the  premises  at  No.  365  West  19th  St.,  formerly  occupied  by  the  Union 
Laundry  Company,  all  as  set  forth  and  specified  in  the  annexed  schedule ; 
to  have  and  to  hold  all  and  singular  the  said  goods  and  chattels  to  the 
said  Clipper  Laundry  Company,  its  successors  and  assigns  to  their  own 
use  and  behoof  forever,  and  the  said  Standard  Laundry  Machine  Com- 
pany does  hereby  covenant  with  the  said  grantee  that  the  said  Standard 
Laundry  Machine  Company  is  the  lawful  owner  of  said  goods  and  chattels; 
that  they  are  free  from  all  liens;  that  it  has  good  right  to  sell  the  same 
as  aforesaid;  and  that  it  will  warrant  and  defend  the  same  against  the 
lawful  claims  and  demands  of  all  persons. 

In  Witness  Whereof,  the  said  Standard  Laundry  Machine 
Company  has  caused  its  corporate  name  to  be  signed 
hereunto  by  its  President,  and  its  corporate  seal  to  be 
affixed  and  duly  attested  by  its  Secretary,  said  corporate 
seal  being  affixed  both  to  these  presents  and  to  the 
schedule  hereunto  annexed,  all  being  done  in  the  City 
of  New  York,  on  this  loth  day  of  May,  191 7. 
(Signature  and  attested  seal  as  in  Form  191.) 


The  inventory  or  schedule  of  the  goods  conveyed  by  this 
bill  of  sale  should  be  attached  to  it,  and,  in  accordance  with 
the  provisions  of  the  conveyance,  be  identified  by  the  duly 
attested  seal  of  the  company. 

Assignments 
Form  189.    Assignment  of  Contract 

Assignment 


Know  All  Men  by  These  Presents  : 

That  for  and  in  consideration  of  the  payment  by  the  Connecticut. 
Valley  Paper  Mills,  a  corporation  organized  under  the  laws  of  the  State 
of  Connecticut  and  having  its  principal  office  and  place  of  business  at  525 
Main  Street,  New  Haven,  Connecticut,  of  Twenty-five  Thousand,  Seven 
Hundred  and  Forty-five  Dollars  ($25,745)  to  the  Holden  Chemical  Com- 
pany, a  corporation  duly  organized  under  the  laws  of  the  State  of  New 
York  and  having  its  principal  office  and  place  of  business  at  152  Warren 
Street,  New  York  City,  the  receipt  of  which  payment  is  by  the  last-named 


ASSIGNMENTS 


733 


corporation  hereby  acknowledged,  said  Holden  Chemical  Company  does 
hereby  assign,  transfer,  and  convey  to  the  said  Connecticut  Valley  Paper 
Mills,  all  and  singular,  its  right,  title,  and  interest  of  every  kind  in  and  to 
a  certain  contract  (copy  of  which  is  hereunto  annexed  and  made  part  of 
this  present  instrument)  entered  into  on  the  31st  day  of  July,  1916,  be- 
tween Martin  S.  Coleman  of  Brooklyn,  New  York,  and  the  said  Holden 
Chemical  Company,  said  contract  vesting  in  the  said  last-named  company, 
its  successors  and  assigns,  under  the  conditions  set  forth  in  said  contract, 
•  the  exclusive  right  to  acquire  and  use  all  the  inventions  and  processes  that 
"  may  hereafter  be  made,  discovered,  or  devised  by  the  said  Coleman  for  the 
manufacture  of  paper  or  to  be  used  in  connection  therewith,  said  contract 
being  conveyed  to  and  accepted  by  the  said  Connecticut  Valley  Paper  Mills 
with  all  its  rights,  privileges,  and  obligations  as  herein  set  forth  and  as 
hereunto  held  by  the  said  Holden  Chemical  Company. 
,  In  Witness  Whereof,  the  said  Holden  Chemical  Company 

has  hereunto  caused  its  corporate  name  and  seal  to  be 
affixed  by  its  President  and  Secretary,  all  being  done  in 
the  City,  County,  and  State  of  New  York,  on  this  28th 
day  of  July,  191 7. 
(corporate)  Holden  Chemical  Company, 

(      seal      )  By  James  Holden, 

President 

Harold  Sheldon, 

Secretary 


Acknowledgment  is  not  essential  to  this  assignment  but 
is  advisable.  The  instrument  as  given  does  not  relieve  the 
assigning  company  from  liability  under  the  assigned  contract. 
To  secure  this,  a  specific  release  from  the  other  party  to  the 
assigned  contract  is  essential.  A  simple  form  of  release  to 
follow,  or  be  attached  to,  the  foregoing  contract  is  as  follows : 


Form  190.    Assent  to  Assignment  of  Contract 


I,  Martin  S.  Coleman  of  Brooklyn,  New  York,  party  of  the  first  part 
to  a  certain  contract  entered  into  on  the  31st  day  of  July,  1916,  with  the 
Holden  Chemical  Company  of  New  York  City,  do  for  good  and  valuable 
considerations,  the  receipt  of  which  is  hereby  acknowledged,  consent  and 
agree  to  the  transfer  of  said  contract  to  the  Connecticut  Valley  Paper 
Mills  as  set  forth  in  the  foregoing  assignment,  and  to  the  substitution  of 
the  said  Connecticut  Valley  Paper  Mills  for  the  Holden  Chemical  Com- 
pany in  said  contract,  and  do  hereby  release,  relieve,  and  discharge  the 
said  Holden  Chemical  Company  from  any  claim,  liability,  or  other  obliga- 
tion for,  on  account  of  or  by  reason  of  said  contract. 

Witness  my  hand  and  seal  this  28th  day  of  July,  191 7. 

Martin  S.  Coleman        [l.  s.J 


734  FORMS   AND    PRECEDENTS 

The  assignment  of  contract  which  follows  is  informal 
but  sufficient  where  the  whole  transaction  is  well  understood. 
In  practice  it  is  usually  indorsed  on  the  back  of  the  contract 
to  be  assigned,  or,  with  the  word  "within"  changed  to  "above 
and  foregoing,"  is  placed  on  the  last  page  of  the  contract. 

Form  19 1.    Assignment  of  Contract — Indorsement  Form 


For  and  in  consideration  of  One  Dollar  and  of  other  sufficient  con- 
siderations, the  receipt  of  all  which  is  hereby  acknowledged,  the  Sterling 
Power  Company  does  hereby  sell,  assign,  and  transfer  to  the  Cohoes  Light 
and  Power  Company  the  within  contract  with  all  the  rights,  privileges, 
obligations,  and  undertakings  thereof  as  therein  set  forth. 

In  Witness  Whereof,  the  signature  and  the  attested  seal  of 
the  said  Sterling  Power  Company  are  hereunto  affixed  by 
its  duly  authorized  officers  this  i6th  day  of  May,  1917. 
(  CORPORATE  }  Sterling  Power  Company, 

I      SEAL      I  ^y  Miller  Sterling, 

President 
Attest  Seal: 

Henry  Welling, 

Secretary 


The  patent  assignment  which  follows  is  in  general  accord 
with  the  forms  approved  by  the  Patent  Office. 

Form  192.     Assignment  of  Patent — Individual  to  Corporation 

Assignment  of  Patent 


Whereas,  I,  Alan  Hudson,  of  Newburgh,  County  of  Orange,  State  of 
New  York,  did  obtain  letters  patent  of  the  United  States  for  an  improve- 
ment in  Car  Couplings,  which  letters  patent  are  numbered  605,948,  and 
bear  date  the  6th  day  of  November  in  the  year  1916;  and 

Whereas,  I  am  now  the  sole  owner  of  said  patent,  and  of  all  rights 
under  the  same ;  and 

Whereas,  The  Montauk  Car  Coupler  Company,  a  corporation  duly 
organized  under  the  laws  of  the  State  of  New  Jersey,  and  having  its 
principal  office  and  place  of  business  at  No.  15  Exchange  Place,  Jersey 
City,  New  Jersey,  is  desirous  of  acquiring  the  entire  interest  in  the  same 
together  with  all  claims  for  profits  and  damages  arising  from  past  infringe- 
ments thereof,  and  the  right  to  sue  for  and  recover  in  its  own  name  on 
all  claims  for  such  infringements : 

Now,  Therefore,  To  all  whom  it  may  concern,  be  it  known,  that  for 


ASSIGNMENTS 


735 


and  in  consideration  of  the  issue  to  my  order  by  the  said  Montauk  Car 
Coupler  Company  of  its  entire  capital  stock,  excepting  Ten  (lo)  Shares 
heretofore  issued  to  the  incorporators  of  said  Company,  the  receipt  of 
which  aforesaid  stock,  amounting  to  Ninety-nine  Thousand  Dollars 
($99,000),  is  hereby  acknowledged,  I,  the  said  Alan  Hudson,  have  sold, 
assigned,  and  transferred,  and  by  these  presents  do  sell,  assign,  and 
transfer,  unto  the  said  Montauk  Car  Coupler  Company,  the  whole  right, 
title,  and  interest  for  the  United  States,  its  colonies,  and  dependencies,  in 
and  to  the  said  improvement  in  car  couplings,  and  in  and  to  the  letters 
patent  therefor  aforesaid  ;  and  the  inventions  covered  thereby,  together  with 
all  claims  for  profits  and  damages  arising  from  past  infringements  of  the 
said  letters  patent,  and  the  right  to  sue  and  recover,  in  its  own  name,  on 
all  claims  for  such  infringements,  the  same  to  be  held  and  enjoyed  by  the 
said  Montauk  Car  Coupling  Company  for  its  own  use  and  behoof,  and  for 
the  uses  and  behoof  of  its  legal  representatives,  successors,  and  assigns, 
to  the  end  of  the  term  for  which  said  letters  patent  are  or  may  be  granted, 
as  fully  and  entirely  as  the  same  would  have  been  held  and  enjoyed  by 
me  had  this  assignment  and  sale  not  been  made. 

In  Testimony  Whereof,  I  have  hereunto  set  my  hand  and 
affixed  my  seal  at  Newburgh,  County  of  Orange,  State 
of  New  York,  this  4th  day  of  May,  191 7. 

Alan  Hudson        [l.  s.] 
In  presence  of 

Jacob  Ellis 

Hendrick  N.  Enslow 


An  assignment  of  patent  does  not  require  notarial  ac- 
knowledgment under  the  rules  of  the  Patent  Office,  but,  as 
an  acknowledgment,  as  already  stated,  is  prima  facie  evi- 
dence of  the  due  execution  of  the  instrument,  it  is  usually 
affixed. 


CHAPTER    LXXXIV 
INSTALMENT  AND  DIVIDEND  BOOKS 

The  Instalment  scrip  or  Instalment  certificate  book  is  a 
book  of  blank  instalment  certificates  (Forms  17,  18)  at- 
tached to  the  proper  stubs,  the  whole  book  being  similar 
in  plan  and  arrangement  to  the  stock  certificate  book.  The 
scrip  or  certificates  of  this  book  are  issued  as  Instalments 
are  paid  on  stock  subscriptions  in  evidence  thereof.  When 
all  the  Instalments  are  paid  and  the  regular  stock  certif- 
icates are  issued  to  the  subscribers,  these  receipts  are  sur- 
rendered to  the  secretary  and  are  by  him  cancelled  and  pasted 
to  their  proper  stubs  in  the  instalment  scrip  book. 

The  instalment  book  is  a  book  in  which  a  record  is  kept 
of  each  instalment  due  on  subscriptions  when  subscriptions 
are  so  payable.  The  arrangement  and  manner  of  keeping  this 
book  are  as  follows : 

Form  193.    Instalment  Book 

INSTALMENT  BOOK 
Instalment  No.  3  of  10  per  cent.    Due  May  i,  1917. 


Subscribers' 
Names 

Shares 

Amount 

Interest 

Paid 

When 
Paid 

Abbott,  John 
Benton,  William  H. 
Brown,  Howard 

75 
50 
60 

$750.00 
500.00 
600.00 

$1.25 

$750.00 
501.25 
600.00 

May  I 
May  15 
April  27 

736 


INSTALMENT   AND   DIVIDEND   BOOKS 


737 


The  purpose  of  the  instalment  book  is  to  record  each 
instalment  of  subscriptions  as  it  becomes  due.  Accordingly 
the  page  or  pages  on  which  an  instalment  is  entered  must 
bs  headed  in  accordance  with  the  facts.  In  the  first  column 
appear  the  subscribers'  names  arranged  alphabetically.  The, 
second  column  is  intended  for  the  ledger  folio  which  need 
be  entered  only  when,  as  is  the  case  in  some  states,  instalment 
payments  must  be  posted  to  the  stock  ledger.  The  third  col- 
umn gives  the  number  of  shares  subscribed  for;  the  fourth 
column  the  amount  of  the  particular  instalment;  the  fifth 
column  any  interest  due  in  case  payment  of  the  instalment 
is  delinquent;  the  sixth  column  the  amount  paid;  and  the 
seventh  the  date  of  payment.  An  additional  column  is  some- 
times a-dded  for  comments. 

The  cash  received  on  instalment  payments  v/ill  also  ap- 
pear on  the  stubs  of  the  instalment  scrip  book  as  the  certif- 
icates are  issued,  and  the  footing  of  column  six  of  the  stock 
instalment  book  should  therefore  agree  with  the  sum  of  the 
similar  payments  shown  on  the  stubs  of  the  instalment  scrip 
book. 

The  dividend  book  contains  for  each  dividend  declared, 
a  list  of  the  stockholders  with  their  respective  stockholdings, 
the  amount  due  each,  the  date  of  its  payment,  and  finally  the 
stockholder's  receipt  therefor.  In  the  larger  corporations  and 
in  many  of  the  smaller  ones,  the  book  is  not  kept  at  all,  divi- 
dend checks  and  vouchers  taking  its  place. 

Usually  the  dividend  book  is  employed  only  when  stock- 
holders are  required  to  call  in  person  and  receive  and  receipt 
for  dividends.  Each  dividend  as  declared  is  recorded  on  one 
or  more  pages,  a  statement  of  the  facts  appearing  at  the  head 
of  the  pages  of  the  particular  record.  The  form  is  simple 
and  its  method  obvious.  Stockholders'  names  are  arranged 
alphabetically,  and  the  signatures  appearing  in  the  last  column 
serve  as  a  receipt  for  the  dividend  payment.     A  signature 


738 


FORMS   AND    PRECEDENTS 


by  an  attorney,  as  in  the  second  example,  is  not  sufficient 
unless  authorized  by  due  power  of  attorney  filed  with  the 
treasurer  of  the  company.     (See  Form  182.) 

Form  194.    Dividend  Book 


DIVIDEND  BOOK 

Dividend  No.  5  of  2%.     Declared  November  i,  1917.     Payable  December 
15.  1917,  to  Stockholders  who  appear  of  record  December  i,  1917. 


Stockholders' 

Names 

Shares 

Amouxt 

Paid 

Received  ey 

Alsop,  John  H. 
Harrington,  Harvey 

50 

25 

$100.00 
50.00 

Dec.  18 
Dec.  15 

John  H.  Alsop 
Howard  Jones,  Atty. 

CHAPTER   LXXXV 

BONDS  OF  INDEMNITY 

Treasurer's  Bond 

The  treasurer's  bond  is  the  formal  undertaking  of  parties 
named  therein  and  by  whom  the  bond  is  signed,  that  in  event 
of  loss  arising  from  specified  acts,  failures,  or  omissions  on 
the  part  of  the  treasurer,  they  will  make  good  the  loss  up  to 
the  amount  of  the  bond.  Formerly  bonds  of  this  nature  were 
almost  invariably  signed  by  the  treasurer  and  his  friends. 
Of  recent  years,  however,  surety  company  bonds  have  largely 
superseded  these  personal  bonds. 

The  following  is  a  common  form  of  treasurer's  personal 
bond. 

Form  195.    Treasurer's  Bond — Personal 

Treasurer's  Bond 


Know  All  Men  by  These  Presents  : 

That  we,  Robert  A.  Bruce  of  New  York  City,  as  principal,  and 
William  H.  Cain  of  Newark,  New  Jersey,  and  H.  B.  McMillan  of  Brook- 
lyn, New  York,  as  sureties,  are  held  and  firmly  bound  unto  the  Sterling 
Transportation  Company,  a  corporation  duly  organized  under  the  laws 
of  the  State  of  New  York,  in  the  sum  of  Ten  Thousand  Dollars  ($10,000), 
to  the  payment  of  which  to  the  said  corporation,  its  successors,  or  as- 
signs, we  do  by  these  presents  jointly  and  severally  bind  ourselves,  our 
heirs,  executors,  and  administrators. 

Signed  and  sealed  this  15th  day  of  August,  1917. 

The  condition  of  the  above  obligation  is  that : 

Whereas,  The  said  Robert  A.  Bruce  has  been  elected  Treasurer  of 
the  said  Sterling  Transportation  Company  for  the  period  of  one  year 
from  the  loth  day  of  August,  191 7,  and  may  hereafter  be  re-elected  to  or 
continue  in  such  office  for  a  further  period : 

Now,  Therefore,  If  the  said  Robert  A.  Bruce  shall  hereafter  in  all 
respects  fully,  faithfully,  and  honestly  perform  and  discharge  the  duties  of 

739 


740  FORMS   AND    PRECEDENTS 

said  office  so  long  as  he  shall  continue  therein,  both  during  the  term  for 
which  he  has  been  elected  and  during  such  further  time  as  he  may  con- 
tinue therein,  whether  by  re-election  or  otherwise,  and  shall  when  properly 
so  required,  fully  and  faithfully  account  to  the  said  corporation,  its  suc- 
cessors, or  assigns,  for  all  moneys,  goods,  and  properties  whatsoever,  for 
or  with  which  the  said  Robert  A,  Bruce  may  in  anywise  be  accountable 
or  beholden  to  the  said  corporation,  and  if  at  the  expiration  of  his  term  of 
or  continuance  in  office,  or  prior  thereto  in  the  event  of  his  death,  resig- 
nation, or  removal  from  office,  all  books,  papers,  vouchers,  money,  and 
other  property  of  whatever  kind  placed  in  his  custody  as  Treasurer  of 
said  corporation,  shall  be  forthwith  restored  to  the  said  corporation,  its 
successors,  or  assigns,  then  this  obligation  shall  be  void,  but  otherwise 
to  remain  in  full  force  and  effect. 

Robert  A.  Bruce  [l.  s.] 

William  H.  Cain  [l.  s.] 

H.  B.  McMillan  [l.  s.] 

Signed,  sealed  and  delivered 
in  the  presence  of 

John  J.  Barr 

W.  H.  Carpenter 


The  treasurer's  bond  must  be  given  under  seal,  and, 
while  not  legally  necessary,  personal  bonds  are  usually  ac- 
knowledged. 

Personal  bonds  are  usually  sweeping  in  their  nature,  cov- 
ering any  and  all  losses  arising  through  any  errors,  misdeeds, 
or  omissions  of  the  treasurer.  When,  however,  a  surety  com- 
pany enters  the  bonding  field,  the  guarantees  are  reduced  to 
the  lowest  possible  terms — usually  to  losses  arising  through 
the  personal  dishonesty  of  the  employee  amounting  to  "larceny 
or  embezzlement."  The  forms  for  these  bonds  are  furnished 
by  the  surety  companies  and  vary  according  to  the  company 
and  the  conditions.  The  general  form  employed  is  too  lengthy 
for  reproduction  in  the  present  volume. 

Bond  for  Lost  Stock  Certificate 

When  a  stock  certificate  is  lost  or  destroyed,  a  bond  of 
indemnity  is  usually  required  before  the  corporate  authorities 
will  undertake  to  replace  the  lost  stock  certificate.  (See  also 
§i8i.) 


BONDS   OF   INDEMNITY  y^i 

Form  196.    Indemnity  Bond  for  Lost  Stock  Certificate 

Indemnity  Bond 


Know  All  Men  by  These  Presents  : 

That  wc,  John  R.  McAlHster  of  Yonkers,  New  York,  as  principal,  and 
Charles  Foster  and  Henry  H.  Clark,  both  also  of  Yonkers,  New  York,  as 
sureties,  are  held  and  firmly  bound  unto  the  Sterling  Transportation  Com- 
pany, a  corporation  duly  organized  under  the  laws  of  the  State  of  New 
York,  in  the  sum  of  Five  Thousand  Dollars  ($5,000),  to  the  payment  of 
which  to  the  said  corporation,  its  successors  or  assigns,  we  do  by  these 
presents  jointly  and  severally  bind  ourselves,  our  heirs,  executors  and 
administrators. 

Signed  and  sealed  this  i8th  day  of  May,  191 7. 

The  condition  of  the  foregoing  obligation  is  that: 

Whereas,  The  said  John  R.  McAllister  is  the  owner  of  record,  as 
shown  by  the  stock  book  of  the  corporation,  of  Forty  (40)  Shares  of  the 
Common  Capital  Stock  of  the  said  Sterling  Transportation  Company,  each 
of  the  par  value  of  One  Hundred  Dollars  ($100),  the  ownership  of  said 
stock  being  further  evidenced  by  Certificate  No.  375  issued  in  the  name  of 
the  said  John  R.  McAllister  on  the   15th  day  of  August,   1916;  and 

Whereas,  The  said  John  R.  McAllister  has  made  application  to  the 
Board  of  Directors  of  the  Sterling  Transportation  Company  for  the  is- 
sue in  his  name  of  a  new  certificate  for  the  said  Forty  (40)  Shares  of 
stock  of  the  said  Company,  alleging  that  original  Certificate  No.  375  is 
lost,  stolen,  or  destroyed  and  that  its  present  whereabouts  and  condition 
are  unknown  to  him;  and 

Whereas,  By  due  and  formal  resolution  of  the  said  Board  of  Direc- 
tors, said  application  has  been  granted  and  a  new  certificate  for  said 
Forty  (40)  Shares  of  the  stock  of  the  said  Sterling  Transportation  Com- 
pany has  this  day  been  issued  to  the  said  John  R.  McAllister : 

Now,  Therefore,  If  the  said  John  R.  McAllister,  his  heirs,  executors, 
and  administrators,  or  any  of  them,  do  and  shall  at  all  times  hereafter, 
save,  defend,  and  indemnify  the  said  Sterling  Transportation  Company, 
its  legal  successors  or  assigns,  of,  from  and  against  all  demands,  claims, 
or  causes  of  action  arising  from  or  on  account  of  the  loss  of  said  Certif- 
icate No.  375  for  Forty  (40)  Shares  of  the  Common  Capital  Stock  of  said 
Company  and  the  issue  of  said  new  certificate  in  place  thereof,  and  of  and 
from  all  costs,  damages,  and  expenses  that  shall  or  may  arise  because  of 
said  reissue,  and  shall  also  deliver  or  cause  to  be  delivered  up  to  the  said 
Sterling  Transportation  Company  for  cancellation  the  said  missing  Cer- 
tificate No.  375  whenever  and  so  soon  as  the  same  shall  be  found  or  re- 
covered, or  come  into  his  possession,  then  this  obligation  shall  be  void; 
otherwise  to  remain  in  full  force  and  effect. 

John  R.   McAllister         [l.s.] 
Charles  Foster  [l.s.I 

Henry  H.  Clark  [l.s.] 

Signed,  sealed  and  delivered 

in  the  presence  of 
Daniel  T.  Baird 
John  K.  Stone 


CHAPTER    LXXXVI 

THE  CORPORATE  CALENDAR 

The  corporate  calendar  is  an  orderly  statement  of  the  im- 
portant corporate  formalities  that  must  be  attended  to  at  fixed 
periods,  so  arranged  that  the  secretary  may  at  any  time  by 
a  mere  glance  see  just  what  corporate  duties  require  his  at- 
tention. 

The  amount  of  detail  entered  on  the  corporate  calendar 
will  vary  according  to  the  preference  of  the  particular  secre- 
tary, from  a  mere  skeleton  outline  of  the  reports  and  notices 
required  by  the  statutes  and  by-laws,  to  a  fairly  complete  digest 
of  corporate  procedure.  It  is  advantageous  to  enter  reasonably 
full  details,  as  much  subsequent  research  may  thereby  be 
avoided. 

The  corporate  calendar  is  frequently  entered  in  the  min- 
ute book.  More  conveniently  it  is  prepared  on  a  special  card 
or  cards,  or  on  a  desk  calendar,  in  either  case  so  placed  or 
hung  that  it  is  plainly  in  sight.  Or  if  the  minute  book  plan 
is  preferred,  a  small  skeleton  calendar  or  "tickler"  may  be 
prepared  in  addition,  which,  kept  on  the  desk,  will  call  atten- 
tion to  the  dates  upon  which  the  calendar  in  the  minute  book 
should  be  consulted. 

The  calendar  which  follows  Is  given  merely  to  show  the 
general  plan  and  the  matter  which  is  usually  included.  It  is 
arranged  for  a  New  York  corporation  having  its  principal 
place  of  business  in  the  Citv  of  New  York  and  holding  its 
annual  meeting  of  stockholders  on  the  third  Wednesday  of 
January  at  10.30  a.m.,  with  quarterly  meetings  of  directors 
on  the  third  Thursday  of  January,  April,  July,  and  October, 

742 


THE   CORPORATE   CALENDAR  743 

at  4  P.M.  Its  by-laws  require  ten  days'  notice  of  annual  meet- 
ings and  five  days'  notice  of  directors'  meetings.  Its  stock 
book  is  closed  fifteen  days  before  the  annual  meeting. 

It  will  be  noticed  that  under  this  arrangement  the  January 
directors'  meeting  will  usually  fall  on  the  day  following  the 
annual  meeting  at  which  directors  are  elected.  If,  then,  this 
election  is  duly  held,  the  regular  notice  of  the  directors'  meet- 
ing is  of  no  effect  as  to  the  newly  elected  directors,  and,  if 
the  by-laws  are  mandatory  as  to  notice,  the  meeting  must  be 
postponed  or  omitted,  or  the  secretary,  disregarding  the  notice 
already  given,  may  provide  for  the  meeting  of  the  board  on 
the  proper  date  by  means  of  a  call  and  waiver  signed  by  all 
the  newly  elected  directors.     (See  Form  55.) 

In  the  calendar  which  follows  the  date  for  each  corporate 
act,  as  filing  reports,  payment  of  taxes,  etc.,  is  in  most  cases 
entered  fifteen  days  in  advance  of  the  last  day  allowed  by  law, 
while  a  memorandum  is  also  entered  as  a  precautionary  meas- 
ure on  the  last  day.  Thus,  a  report  that  may  be  deferred  if 
desired  until  the  31st  day  of  January,  is  entered  on  the  calen- 
dar under  date  of  January  i6th.  This  is  a  matter  that  may 
be  varied  to  suit  the  individual. 

Form  197.    Corporate  Calendar — New  York 


Corporate  Calendar 

of  the 

HUDSON  RIVER  PACKING  COMPANY 

OF  New  York  City 

1917 


January 


1.  Last  Day   for  payment  of  State  Income  Tax. 

2.  Close  Transfer  Books  for  annual  meeting  of  January  17, 

191 7. 

3.  First  Publication   of   notice  of  annual   meeting  of   stock- 

holders in  accordance  with  Sec.  25  of  the  Stock  Cor- 
poration Law.      (Publication  may  be  dispensed  with  if 


744 


FORMS  AND   PRECEDENTS 


February 

March 
April 

May 
June 


July 


waived  in  writing  by  every  stockholder  of  the  corpora- 
tion.) 
7.   Mail   Notice   of    annual    meeting    to    each    stockholder   6i 
record  at  his  last  known  post-office  address. 

10.  Second  Publication  of  notice  of  annual  meeting  of  stock- 
holders. 

13.  Notify  Directors  of  meeting  to  be  held  January  18.  If 
directors  are  elected  at  annual  meeting  (January  17), 
this  notice  will  be  vitiated  as  to  all  directors  elected  at 
such  meeting  and  must  be  replaced  by  waiver  of  notice 
signed  after  election  by  all  the  newly  elected  directors. 

15.  Franchise .  Tax  Payable.     Must  be  paid  before   February 

14.  Based  upon  November  report  to  State  Tax  Com- 
mission. Checks  should  be  made  payable  to  State  Treas- 
urer. 

16.  Annual  Report  to   State  Officials.     Must  be  filed   during 

January  and  not  later  than  January  31  with  Secretary 
of  State.  No  filing  fees.  Blanks  not  supplied  by  officials. 
No  penalty  incurred  for  omission  of  the  report  unless 
such  filing  is  requested  by  some  stockholder  or  creditor 
of  the  Company,  and  not  then  if  the  report  is  filed 
within  thirty  days  after  the  request  is  made. 

17.  Annual  Meeting  of  stockholders  at  10.30  a.m.     (Held  pur- 

suant to  notice  sent  out  January  7.) 

18.  Directors'  Meeting  at  4  p.m.     If  directors  were  elected  at 

annual  meeting,   waiver  of  notice  should  be   signed  by 
each  new  director. 
31.   Last  Day  for  filing  annual  report. 

13.  Federal  Income  Tax  Report  must  be  filed  on  or  before 

March  i. 

14.  Last  Day  for  payment  of   State  Franchise  Tax  without 

penalty. 

I.   Last  Day  to  file  Federal  Income  Tax  Report. 

14.  Notify  Directors  of  meeting  to  be  held  April  19. 

19.  Directors'  Meeting  at  4  p.m. 

I.  New  York  City  Taxes  Payable.  Statement  of  amount  may 
be  obtained  from  Assessor's  office.  One-half  of  taxes  on 
real  property  may  be  deferred  till  November  i  next. 

I.  New  York  City  Taxes.  If  not  paid,  interest  at  7  per 
cent  from  May  i  will  be  added  on  all  personal  taxes  and 
the  first  half  of  the  real  estate  tax. 

15.  State  Income  Tax  Report  must  be  filed  on  or  before  July  i. 

I.   Last  Day  to  file  State  Income  Tax  Report. 

14.  Notify  Directors  of  meeting  to  be  held  July  19. 

15.  Federal  Income   Tax.     Last   day  to   pay   in   time   tax   to 

Collector  of  Internal  Revenue  without  penalty. 
19.  Directors'  Meeting  at  4  p.m. 


THE   CORPORATE   CALENDAR 


745 


October 


November 


I.  New  York  City  Assessments  made  for  coming  year  (1918). 
If  notice  of  amount  is  not  received  in  early  part  of 
October,  it  should  be  sent  for.  Tax  Commissioners 
usually  send  notice  but  are  under  no  obligations  to  do  so. 
Books  are  open  for  correction  until  November  15  as  to 
real  estate,  and  November  30  as  to  personal  estate. 
Statements  must  be  filed  before  that  date. 

13.   Notify  Directors  of  meeting  to  be  held  October  18. 

18.  Directors'  Meeting  at  4  p.m. 

I.   Franchise  Tax  Report.    Must  be  sent  in  on  or  before  No- 
vember  15.     Blanks   furnished  by  and   report   made  to 
State   Tax   Commission.     No  filing   fees,     Penalty  may 
be  incurred  by  failure  to  make  this  report. 
Second  Half  of  real  estate  tax  due. 
15.   Last  Day  for  filing  application  for  revision  of  real  estate 

assessment. 
30.   Last  Day  for  filing  application  for  revision  of  personal 
estate  assessment. 


December 


I.   Real  Estate  Taxes.    If  second  half  of  real  estate  tax  is  not 
paid,  7  per  cent  interest  will  be  added  from  November  I. 
16.  State  Income  Tax  payable  January  i. 


CHAPTER    LXXXVII 
CORPORATE  BOND  ISSUES 

The  more  important  instruments  involved  in  an  issue  of 
corporate  bonds  are  the  bond  itself,  which  is  comparatively 
simple  in  form,  and  the  mortgage  or  deed  of  trust,  which  is 
lengthy  and  complex. 

The  corporate  bond  in  its  usual  form  is  a  promissory  note, 
differing  from  the  ordinary  corporate  note  only  in  its  for- 
mality, its  more  complete  statement  of  the  conditions  under 
which  it  is  issued,  its  formal  execution,  and  in  its  being  one 
of  a  series  of  like  obligations  secured  by  the  same  collateral. 
(See  Form  198.) 

There  is  practically  no  difference  as  to  form  between  the 
bonds  and  the  short-term  note  so  frequently  issued  by  cor- 
porations of  the  present  day,  save  as  to  the  length  of  time  for 
which  they  run.  The  short-term  note,  as  its  name  indicates, 
is  usually  given  for  a  short  period — one  to  five  years — while 
the  bond  usually  extends  over  a  much  longer  period,  ranging 
from  five  to  one  hundred  years  or  more. 

Interest  on  bonds  is  usually  represented  and  provided  for 
by  means  of  coupons,  which  are  in  effect  promissory  notes, 
payable  to  bearer,  each  calling  for  the  payment  of  one  instal- 
ment of  interest  on  the  bonds.  (See  Form  199.)  This  interest 
when  due  is  payable  only  on  surrender  of  the  proper  coupon 
and,  in  the  absence  of  some  good  reason  otherwise,  such  as 
notice  that  the  particular  coupon  has  been  stolen,  is  payable 
to  anyone  who  presents  the  coupon. 

Interest  on  bonds  is  usually  payable  semiannually  and  each 
of  the  coupons  of  a  coupon  bond  calls  for  the  exact  amount 

746 


CORPORATE   BOND   ISSUES 


747 


of  one  of  the  semiannual  interest  payments  on  that  bond. 
Thus,  a  bond  running  ten  years  with  interest  payable  semi- 
annually, will  have  attached  to  it  twenty  coupons.  Each  cou- 
pon bears  the  same  number  as  its  bond  for  purposes  of  gen- 
eral identification,  but  also  has  a  serial  number  or  some  specific 
statement  indicating  the  order  in  which  it  comes  due  and  the 
particular  interest  payment  for  which  it  calls. 

Coupon  bonds  are  usually  made  payable  to  bearer,  and 
ownership  passes  by  delivery.  When  it  is  desired  that  bonds 
shall  not  pass  by  mere  delivery,  they  are  registered,  i.e.,  issued 
in  the  name  of  some  particular  person  as  is  a  certificate  of 
stock,  the  bond  thereafter  being  transferable  only  on  the  books 
of  the  company. 

Coupon  bonds  are  sometimes  registered  as  to  principal, 
but  the  coupons  are  still  made  payable  to  bearer.  The  interest 
then  is  paid  to  anyone  who  presents  the  coupon,  but  the  prin- 
cipal when  due  is  paid  only  to  the  person  in  whose  name  the 
bond  stands  on  the  books  of  the  company. 

Bonds  without  coupons  are  always  registered,  are  trans- 
ferred only  by  assignment,  interest  is  payable  to  the  registered 
owner  alone,  and  is  usually  paid  by  check  sent  out  to  these 
registered  owners. 

Coupon  bonds  payable  to  bearer  and  registered  bonds  with- 
out coupons  are  often  issued  under  the  same  deed  of  trust. 
Usually  when  this  is  done,  the  two  classes  of  bonds  are  made 
interchangeable,  i.  e.,  the  holder  of  a  coupon  bond  may  at  any 
time  exchange  it  for  a  registered  bond,  or  vice  versa.  The 
advantage  of  the  unregistered  coupon  bond  is  found  in  the 
readiness  with  which  it  may  be  transferred.  The  advantage 
of  a  registered  bond  lies  in  the  difficulty  of  its  negotiation  in 
case  the  bond  is  lost  or  stolen. 

The  bond  register  is  a  book  of  record  in  which  are  entered 
the  data  relating  to  bond  issues,  showing  for  each  bond,  its 
number,  date,  names  of  the  parties  to  whom  issued,  any  trans- 


748  FORMS   AND   PRECEDENTS 

fers,  and  the  due  dates  and  amounts  of  interest  payments. 
The  coupon  register  is,  as  its  name  indicates,  a  book  in  which 
coupons,  cHpped  and  presented  for  payment,  are,  after  can- 
cellation, pasted  in  convenient  form  for  subsequent  refer- 
ence. 

The  following  form  is  that  of  a  coupon  bond,  the  owner- 
ship passing  by  mere  delivery.  It  may,  however,  be  registered 
at  the  option  of  the  owner,  though  this  registration  does  not 
affect  the  coupons.  (See  Form  199.)  These  pass  by  delivery 
alone  and  are  payable  to  bearer  regardless  of  whether  his  bond 
be  registered  or  transferable  by  delivery. 

Form  198.    Coupon  Bond 


United  States  of  America 

State  of  New  York 

No.  375.  $500.00 

MAXWELL  COMPRESSOR  COMPANY 

First  Mortgage  Six  Per  Cent  Gold  Bonds 


Know  All  Men  by  These  Presents,  That  the  Maxwell  Compressor 
Company,  a  corporation  organized  under  the  laws  of  the  State  of  New 
York,  for  value  received,  hereby  promises  to  pay  to  the  bearer  hereof,  or 
if  this  bond  is  registered,  to  the  registered  holder  thereof,  at  the  office 
of  the  Securities  Trust  Company  of  the  City  of  New  York,  on  the  first 
day  of  December,  nineteen  hundred  and  forty-seven,  in  gold  coin  of  the 
United  States  of  America,  of  the  present  standard  of  weight  and  fineness, 
or  its  equivalent,  the  sum  of  Five  Hundred  Dollars,  without  deduction 
from  either  such  principal  or  interest  for  or  on  account  of  any  United 
States,  State,  municipal,  or  other  tax  or  taxes  which  the  Maxwell  Com- 
pressor Company,  its  successors  or  assigns,  may  be  required  to  pay  or 
deduct  therefrom,  and  the  Maxwell  Compressor  Company  hereby  cove- 
nants and  agrees  to  pay  all  such  tax  or  taxes,  and  in  the  meantime  to  pay 
interest  upon  the  said  sum  of  Five  Hundred  Dollars  from  and  after  the 
first  day  of  December,  nineteen  hundred  and  seventeen,  at  the  rate  of  six 
per  cent  per  annum,  payable  in  like  gold  coin,  or  its  equivalent,  at  the 
same  place,  semiannually,  on  the  first  days  of  June  and  December  in  each 
year,  beginning  with  the  first  day  of  June,  1917,  on  presentation  and  sur- 
render of  the  coupons  hereto  attached  as  each  of  them  becomes  due. 

This  bond  is  one  of  a  series  of  One  Thousand  (1,000)  bonds  of  the 
.same  tenor  and  date,  aggregating  Five  Hundred  Thousand  Dollars 
($500,000),  numbered  consecutively  from  one  to  one  thousand,  both 
inclusive,  for  the  sum  of  Five  Hundred  Dollars  ($500)  each,  all 
of  which  bonds  are  secured  equally  by  a  deed  of  trust,  which  is  a  fiirst 


CORPORATE   BOND   ISSUES 


749 


mortgage  upon  the  properties  of  the  Maxwell  Compressor  Company, 
executed  and  delivered  by  the  said  Maxwell  Compressor  Company  to  the 
said  Securities  Trust  Company,  as  Trustee,  granting  and  conveying  in 
trust  and  mortgaging  as  security  for  the  payment  of  the  principal  of 
said  bonds  at  maturity,  at  par,  and  the  interest  on  said  bonds,  payable 
semiannually  at  the  rate  aforesaid,  all  the  real  estate  and  other  property 
of  the  said  Maxwell  Compressor  Company  mentioned  and  described  in 
said  deed  of  trust,  with  full  power  to  use  and  sell  the  same  in  the  event 
of  default  in  payment  of  the  bonds  or  coupons,  or  any  of  them,  and 
apply  the  proceeds  to  the  payment  of  same  as  in  said  deed  of  trust 
provided.  This  bond  is  issued,  received,  and  held  subject  to  all  and 
singular  the  terms  and  conditions  contained  in  the  deed  of  trust  aforesaid. 
This  bond  is  further  secured  by  a  sinking  fund,  which  shall  consist  of 
and  be  maintained  by  the  payment  to  the  said  Securities  Trust  Company 
by  the  Maxwell  Compressor  Company  on  the  first  day  of  December,  1922, 
and  on  each  succeeding  first  day  of  December  thereafter,  until  the  re- 
demption of  all  the  bonds  issued  under  said  deed  of  trust,  of  twenty-five 
dollars  for  each  thousand  dollars  of  bonds  then  issued  and  outstanding, 
such  moneys  so  paid  to  be  used  in  the  purchase  of  outstanding  bonds  at 
the  lowest  price  at  which  they  may  be  had,  not  exceeding,  however,  one 
hundred  and  ten  per  centum  of  the  face  of  said  bonds  plus  accrued  in- 
terest, and  if  bonds  cannot  be  so  purchased,  such  moneys  shall  be  used 
in  the  redemption  of  the  bonds  outstanding,  as  hereinafter  provided. 

This  bond  shall  not  become  obligatory  until  the  certificate  indorsed 
hereon  shall  be  signed  by  the  Trustee,  and  when  so  authenticated  by  the 
signature  of  the  trustee  the  title  to  said  bond  shall  pass  by  delivery,  un- 
less said  bond  is  registered,  and,  if  registered,  the  title  thereto  shall  pass 
only  by  transfer  on  the  books  of  said  Trust  Company,  and  no  transfer 
except  upon  said  books  shall  be  valid  unless  the  last  transfer  shall  have 
been  to  bearer,  which  shall  restore  transferability  by  delivery. 

This  bond  is  redeemable,  at  the  option  of  the  Maxwell  Compressor 
Company,  on  any  interest  day  at  any  time  after  the  first  day  of  December, 
1922,  at  no  per  cent  of  its  face  value,  plus  accrued  interest,  provided  that 
thirty  days'  notice  of  such  redemption  shall  be  given  the  holder  thereof 
by  notice  published  once  a  week  for  four  consecutive  weeks  prior  to  such 
redemption,  in  a  newspaper  published  in  New  York  City. 

In  Witness  Whereof,  the  said  Maxwell  Compressor  Com- 
pany hath  caused  these  presents  to  be  signed  by  its  Presi- 
dent, and  its  corporate  seal,  duly  attested  by  its  Secretary, 
to  be  hereunto  affixed,  and  hath  hereunto  affixed  coupons 
with  the  name  of  its  Treasurer  engraved  thereon,  and 
hath  caused  this  bond  to  be  dated  the  first  day  of  De- 
cember, A.  D.  one  thousand,  nine  hundred  and  seventeen. 
J  CORPORATE  7  Maxwell  Compressor  Company, 

I      seal      j  By  Howard  M.  Maxwell, 

President 
Attest: 

Frank  Paulson, 
Secretary 


The  coupon  form  which  follows  is  as  it  appears  attached 
to  the  preceding  bond. 


750  FORMS   AND   PRECEDENTS 

Form  199.    Coupon 


No.  I  $15.00 

MAXWELL   COMPRESSOR  COMPANY 

will  pay  to  the  bearer  at  the  office  of  the  Securities  Trust  Company  of 
the  City  of  New  York  the  sum  of  Fifteen  Dollars  ($15),  in  United  States 
Gold  Coin,  or  its  equivalent,  on  the  first  day  of  June,  1918,  being  six 
months'  interest  on  its  First  Mortgage  Six  Per  Cent  Gold  Bond  No.  375. 

William  H.  Powers, 

Treasurer 


The  following  trustee's  certificate  is  as  it  appears  upon 
the  bond  shown  in  Form  198. 

Form  200.    Trustee's  Certificate 


The  Securities  Trust  Company  of  the  City  of  New  York  hereby  cer- 
tifies that  the  within  Bond  is  one  of  the  series  of  Bonds  described  in  the 
Deed  of  Trust  therein  mentioned. 

Securities  Trust  Company  of  the 
City  of  New  York, 

Trustee 
By  Malcolm  McDougald, 

President 


The  formalities  of  a  bond  issue  are  usually  regulated  by 
the  statutes  of  the  particular  state  in  which  the  corporation  is 
organized.  Thus  in  New  York  an  issue  of  bonds  requirec 
(i)  a  stockholders'  resolution  or  written  consent;  (2)  a  cer- 
tificate of  the  corporate  officials  that  the  stockholders'  consent 
has  been  given;  and  (3)  a  directors'  resolution  reciting  the 
facts,  authorizing  the  officers  to  proceed  in  the  matter,  and 
providing  for  the  details  of  the  transaction.  The  matter  is 
one  to  be  undertaken  only  by  a  skilled  lawyer. 

In  some  states  the  mere  resolution  of  the  board  of  directors 
is  sufficient  to  authorize  a  bond  issue.  In  a  large  number  of 
states  the  assent  of  a  prescribed  majority  of  the  stockholders 
is  a  requisite.    As  a  matter  of  prudence  and  good  business,  a 


CORPORATE   BOND   ISSUES 


751 


proper  stockholders'  authorization  is  always  desirable  regard- 
less of  the  statute  requirements  existing  in  the  particular 
state. 

The  following  deed  of  trust,  while  drawn  in  compliance 
with  the  requirements  of  the  New  York  statutes,  may  be 
readily  adapted  for  use  in  any  other  state. 

Form  201.    Deed  of  Trust 

Deed  of  Trust 


This  Indenture,  made  and  entered  into  this  12th  day  of  November 
one  thousand  nine  hundred  and  seventeen,  by  and  between  the  Maxwell 
Compressor  Company,  a  corporation  duly  organized  and  existing  under 
the  laws  of  the  State  of  New  York,  having  its  office  at  No.  170  Broadway, 
New  York  City,  hereinafter  called  the  Compressor  Company,  party  of  the 
first  part,  and  the  Securities  Trust  Company  of  the  City  of  Nev/  York, 
a  corporation  duly  organized  and  existing  under  the  laws  of  the  State  of 
New  York,  having  its  principal  office  at  No.  98  Wall  Street,  New  York 
City,  as  Trustee,-  hereinafter  called  the  Trustee,  party  of  the  second  part ; 
Witnesseth : 

Whereas,  The  Board  of  Directors  of  the  said  Compressor  Company 
has,  by  the  authority  and  with  the  consent  of  the  stockholders  thereof 
legally  given,  duly  resolved  to  borrow  Five  Hundred  Thousand  Dollars 
($500,000)  for  the  lawful  business  purposes  of  the  said  Company,  and 
for  that  purpose  to  execute  and  issue  its  first  mortgage  six  per  cent 
thirty-year  gold  bonds  of  the  par  value  of  five  hundred  dollars  each, 
dated  the  first  day  of  December,  1917,  and  payable  on  the  ist  day  of 
December,  1947,  in  gold  coin  of  the  United  States  of,  or  equivalent  to, 
the  present  standard  of  weight  and  fineness,  said  bonds  to  bear  interest 
at  the  rate  of  six  per  cent  per  annum,  payable  in  like  gold  coin,  semi- 
annually, on  the  first  days  of  June  and  December  in  each  year,  from  the 
first  day  of  December,  1917,  until  the  payment  of  the  principal  amount 
thereof;  the  payment  of  the  principal  and  interest  of  said  bonds  to  be 
secured  by  a  mortgage  or  deed  of  trust  that  shall  be  a  first  mortgage 
on  the  entire  property  of  the  said  Compressor  Company  as  hereinafter 
described,  said  deed  of  trust  to  be  in  substantially  the  form  of  this  inden- 
ture; and 

Whereas,  The  bonds  so  to  be  issued  are  to  be  in  substantially  the 
form  following,  viz.: 

(See  Form  198.) 

And  Whereas,  There  are  to  be  attached  to  each  of  the  said  bonds,  at 
the  time  of  the  issue  thereof,  coupons  representing  the  semiannual  instal- 
ments of  interest  which  are  to  become  due  thereon,  each  of  which  coupons 
is  to  be  substantially  of  the  following  tenor,  the  proper  coupon  number, 
date  of  payment,  amount  of  the  bond  and  its  number,  and  the  engraved 


752  FORMS   AND    PRECEDENTS 

fac-simile  signature  of  the  Treasurer  of  the  Compressor  Company,  having 
been  inserted  in  the  respective  blanks  therefor,  to  wit: 

(See  Form  igg.) 

And  Whereas,  On  .each  of  said  bonds  there  is  to  be  indorsed  a  cer- 
tificate of  the  Trustee  or  its  successor  appointed  hereunder,  of  the  fol- 
lowing tenor: 

(See  Form  200.) 

Now,  Therefore,  the  said  Compressor  Company,  in  consideration  of 
the  premises  and  of  the  sum  of  one  dollar  to  it  in  hand  paid  by  the  said 
Trustee,  the  receipt  whereof  is  hereby  acknowledged,  and  in  order  to 
secure  the  due  payment  of  the  principal  and  interest  of  the  bonds  to  be 
issued  hereunder,  and  to  insure  the  faithful  performance  of  the  covenants 
and  agreements  herein  contained,  hath  granted,  bargained,  sold,  aliened, 
assigned,  conveyed,  transferred,  and  set  over,  and  by  these  presents  doth 
grant,  bargain,  sell,  alien,  assign,  convey,  transfer,  and  set  over  unto  the 
said  Trustee,  its  successors  and  assigns; 

All  of  the  following  described  property  and  franchises  of  the  Com- 
pany, to  wit: 

(Specific  description   of  the  property  mortgaged.) 

To  Have  And  To  Hold  all  and  singular  the  said  property,  with  all 
real  estate,  buildings,  fixtures,  articles,  and  property  of  every  kind,  be- 
longing to  or  pertaining  to  the  same  unto  the  said  Trustee,  its  successors 
and  assigns  forever; 

In  Trust,  Nevertheless,  for  the  equal  pro  rata  benefit  and  security 
of  any  and  all  persons  and  parties  who  may  be  or  become  the  owners  or 
lawful  holders  of  any  of  the  bonds  to  be  issued  hereunder  and  secured 
hereby,  irrespective  of  date  or  priority  of  issue,  without  any  discrimina- 
tion, preference,  or  priority  of  any  one  bond  over  another  or  others,  by 
reason  of  priority  in  time  of  issue,  or  sale,  or  negotiation  thereof,  or 
otherwise,  and  to  secure  the  due  payment  of  each  of  the  said  bonds  to- 
gether with  the  interest  thereof,  and  for  the  uses  and  purposes  and  upon 
the  terms  and  conditions  hereinafter  declared  and  expressed;  and 

It  Is  Hereby  Expressly  Covenanted  and  Agreed  by  and  between  the 
parties  hereto  that  all  such  bonds  are  to  be  issued,  negotiated,  and  re- 
ceived, and  that  the  said  property  and  franchises  mortgaged  are  to  be  held 
by  the  Trustee  upon  and  subject  to  the  following  further  trusts,  uses, 
conditions,  and  covenants,  that  is  to  say: 

First — The  bonds  to  be  issued  hereunder  shall  be  executed  on  behalf 
of  the  Compressor  Company  by  its  proper  officers  and  shall  be  delivered 
to  the  Trustee  for  certification,  and  said  Trustee  shall  certify  and  de- 
liver said  bonds  so  certified  upon  the  order  of  the  Board  of  Directors  of 
the  Compressor  Company.  An  order  purporting  to  be  the  order  for  de- 
livery of  said  bonds  and  believed  by  the  Trustee  to  be  genuine  shall  be 
conclusive  authority  and  full  protection  to  the  Trustee  for  the  certification 
and  delivery  of  the  bonds. 

Only  such  bonds  as  shall  bear  thereon  indorsed  the  Trustee's  cer- 
tificate, duly  executed,  shall  be  secured  by  this  indenture,  or  entitled  to 
any  lien,  right,  or  benefit  thereunder,  and  such  certificate  of  the  Trustee 
upon  any  such  bond  executed  by  the  Compressor  Company  shall  be  con- 
clusive evidence  that  the  bond  so  certified  has  been  duly  issued  thereunder, 
and  that  the  holder  is  entitled  to  the  benefit  of  the  trust  hereby  created. 


CORPORATE   BOND    ISSUES  753 

Before  certifying  or  delivering  any  bond,  all  coupons  thereon  then 
matured  shall  be  cut  off,  cancelled,  and  delivered  to  the  Compressor  Com- 
pany. 

Second — All  bonds  secured  hereunder  may  be  registered  in  the  name 
of  the  holder,  when  so  requested  by  such  holder,  upon  bond  transfer 
books  which  the  Compressor  Company  shall  maintain  and  keep  for  such 
purpose  at  the  office  of  the  Trustee  in  the  City  of  New  York  as  long  as 
any  of  the  said  bonds  shall  remain  outstanding.  After  such  registration 
such  bonds  shall  be  transferable  only  upon  such  transfer  books,  by  the 
registered  owner  or  his  lawful  attorney,  and  any  such  transfer  shall  be 
noted  on  the  bonds  by  the  indorsement  of  the  Transfer  Agent  hereinafter 
appointed.  After  registration  of  any  bond,  the  principal  thereof  shall  be 
payable  only  to  the  registered  owner,  but  the  coupons  shall  be  payable  to 
the  bearer  upon  presentation  and  surrender  thereof,  and  shall  be  nego- 
tiable by  delivery  as  if  such  bond  was  not  registered. 

Any  registered  bond  may  at  any  time  be  transferred  by  the  registered 
owner  thereof,  upon  said  transfer  books  to  bearer,  and  such  transfer  shall 
be  noted  upon  said  bond,  and  the  said  bond  shall  thereupon  be  negotiable 
by  delivery  as  if  it  had  never  been  registered,  and  each  of  said  bonds  shall 
continue  subject  to  successive  registrations  and  transfers  to  bearer  at  the 
option  of  the  holder  thereof. 

For  the  purpose  of  registering  and  transferring  said  bonds  as  above 
set  forth,  the  Securities  Trust  Company  of  the  City  of  New  York  is  here- 
by appointed  and  constituted  Transfer  Agent  of  the  said  Compressor 
Company. 

Third — Until  default  shall  be  made  by  the  Compressor  Company,  its 
successors  or  assigns,  in  the  payment  of  the  principal  or  interest  of  the 
bonds  hereby  secured,  or  any  of  them,  or  in  the  performance  of  any  of 
the  covenants,  agreements,  and  provisions  on  its  part  to  be  kept  and  per- 
formed, as  herein  set  forth,  the  Compressor  Company,  its  successors  and 
assigns  shall  be  permitted  to  possess,  manage,  use,  and  occupy  the  prem- 
ises affected  hereby,  with  all  their  appurtenances  and  belongings  in  all 
respects  as  fully  as  if  this  indenture  had  not  been  made. 

Fourth — If  the  Compressor  Company  shall  well  and  truly  pay  to  the 
holders  thereof  the  principal  of  the  bonds  secured  hereunder  and  the  in- 
terest moneys  becoming  due  thereon  respectively  at  the  time  and  in  the 
manner  specified  in  the  said  bonds  and  coupons  thereto  annexed,  and  shall 
keep  and  perform  all  the  covenants,  agreements,  and  stipulations  on  its 
part  in  said  bonds  or  in  this  agreement  contained,  then  these  presents  and 
the  trust  hereby  created  shall  cease  and  determine,  and  the  said  Trustee 
shall  in  such  event  release  and  discharge  this  mortgage  and  the  property 
and  premises  encumbered  thereby.  The  Trustee  may  also  execute  such 
release  and  discharge  upon  production  by  the  Compressor  Company  or  its 
assigns  of  all  the  bonds  issued  hereunder,  together  with  the  coupons 
thereto  belonging,  cancelled  or  for  cancellation,  and  the  Trustee  shall  not 
be  under  any  liability  or  obligation  to  inquire  into  the  holding  of  said 
bonds  by  the  Compressor  Company  or  its  assigns. 

Fifth — The  said  Compressor  Company,  while  it  shall  be  in  possession 
of  the  mortgaged  premises,  and  while  there  shall  be  no  existing  default  in 
respect  of  the  payment  of  the  principal  or  interest  of  any  of  the  said  bonds 
of  the  Compressor  Company,  or  in  the  performance  of  any  of  the  cove- 


^^  FORMS   AND   PRECEDENTS 

nants  herein,  may,  with  the  consent  in  writing  of  the  Trustee,  sell  any 
portion  of  the  premises  heretofore  granted.  If,  in  the  opinion  of  the 
Board  of  Directors  of  the  Compressor  Company,  such  sale  or  change  shall 
be  expedient,  said  opinion  shall  be  expressed  in  a  resolution  of  the  said 
Board,  and  the  Trustee  may  upon  delivery  to  it  of  a  copy  of  the  resolution 
of  the  Board  of  Directors  to  that  effect  release  from  the  lien  and  opera- 
tion of  this  indenture  any  part  of  the  premises  hereby  mortgaged,  pro- 
vided that  the  purchase  money  from  such  sale  or  sales  shall  be  paid  to  the 
said  Trustee  for  application  to  the  discharge  of  the  bonds  and  coupons 
hereunder  issued,  as  set  forth  in  Section  Fifteenth,  or  to  be  set  aside  to  be 
applied  by  the  Compressor  Company  in  payment  for  other  real  or  personal 
property  or  in  betterments  of  or  additions  to  some  part  of  the  premises 
mortgaged  hereby,  and  until  so  applied  shall  be  held  by  the  Trustee.  Any 
new  property  so  acquired  by  the  Compressor  Company  shall  ipso  facto 
become  and  be  subject  to  the  lien  of  this  indenture  as  fully  as  if  specifi- 
cally mortgaged  or  pledged  hereby,  but  if  requested  by  the  Trustee  the 
Compressor  Company  shall  execute  special  instruments  of  incumbrance 
upon  such  properties. 

Sixth — The  Compressor  Company  covenants  and  agrees  that  it  shall 
and  will  promptly  pay  the  interest  and  the  principal  of  the  bonds  hereby 
secured,  at  the  time  and  in  the  manner  specified  in  said  bonds  and  the 
coupons  thereto  attached,  without  deduction  from  either  such  principal  or 
interest  for  or  on  account  of  any  United  States,  State,  municipal,  or  other 
tax  or  taxes  which  the  Compressor  Company,  its  successors  or  assigns, 
may  be  required  to  pay  or  deduct  therefrom,  and  the  Compressor  Com- 
pany hereby  covenants  and  agrees  to  pay  all  such  tax  or  taxes. 

The  Compressor  Company  further  covenants  and  agrees  that  it  shall 
and  will,  from  time  to  time,  promptly  pay  and  discharge,  or  cause  to  be 
paid  and  discharged,  all  taxes,  rates,  levies,  or  assessments  and  charges, 
ordinary  and  extraordinary,  levied  or  imposed  upon  the  premises  and 
properties  mortgaged  to  the  Trustee  to  secure  the  payment  of  the  bonds 
issued  hereunder,  whereby  the  lien  of  this  indenture  might  or  could  be 
held  prior  or  equal  to  the  lien  of  this  indenture,  so  that  the  same  shall 
not  fall  into  arrears  and  so  that  the  priority  of  this  indenture  given  to 
secure  said  bonds  shall  be  preserved. 

The  Compressor  Company  further  covenants  and  agrees  that  it  will 
not  create  nor  suffer  any  mechanic's,  laborer's,  or  other  similar  liens  to 
be  created  upon  the  premises  and  property  mortgaged  to  secure  the  bonds 
issued  hereunder,  whereby  the  lien  of  this  indenture  might  or  could  be 
impaired,  until  the  bonds  so  secured  hereunder,  with  all  the  interest  ac- 
crued thereon,  shall  have  been  fully  paid  and  satisfied. 

Seventh — A  sinking  fund  shall  be  created  for  the  redemption  of  the 
bonds  issued  hereunder.  It  shall  consist  of  and  be  maintained  by  the 
payment  to  the  Trustee  by  the  Compressor  Company  on  the  first  day  of 
December,  1922,  and  on  each  succeeding  first  day  of  December  thereafter 
until  the  redemption  of  all  the  bonds  issued  hereunder,  of  twenty-five 
dollars  for  each  thousand  dollars  of  bonds  then  issued  and  outstanding, 
such  moneys  so  paid  to  be  used  in  the  purchase  of  outstanding  bonds  at 
the  lowest  price  at  which  they  may  be  had,  not  exceeding,  however,  one 
hundred  and  ten  per  centum  of  the  face  value  of  said  bonds,  plus  ac- 
crued interest,  and  if  bonds  cannot  be  so  purchased,  such  money  shall 
be  used  in  redemption  of  bonds  outstanding  as  provided  and  set  forth  in 
Section  Fifteenth  of  this  present  indenture. 


T  CORPORATE   BOND   ISSUES  7^5 

Eighth — The  Compressor  Company  covenants  and  agrees  that*  this 
deed  of  trust  delivered  to  the  Trustee  shall  be  a  first  mortgage  upon  the 
premises  and  property  aflFected  thereby,  that  the  same  shall  be  duly  ex- 
ecuted and  recorded  in  the  proper  office  of  registry  in  the  County  of  New 
York  where  the  said  premises  are  situated,  and  that  the  Compressor 
Company  will  execute  and  deliver  such  further  deeds,  transfers,  pledges, 
and  assurances  as  the  Trustee,  under  the  advice  of  counsel  learned  in  the 
law,  shall  reasonably  require  for  the  better  accomplishing  of  the  pur- 
poses and  provisions  of  this  indenture. 

Ninth — The  Compressor  Company  covenants  and  agrees  that  all 
buildings,  structures,  and  machinery  situated  upon  the  properties  affected 
by  this  mortgage  given  to  secure  the  bonds  issued  hereunder,  shall  be 
kept  insured  during  the  entire  term  of  this  indenture  to  the  amount  of 
insurance  on  such  properties  usually  allowed  by  insurance  companies, 
against  loss  or  damage  by  fire,  and  against  loss  or  damage  from  boiler 
explosions,  and  that  the  said  Compressor  Company  shall  and  will  pay  all 
premiums  upon  all  policies  for  such  insurance.  All  such  policies  shall  be 
made  payable  to  the  Trustee,  and  shall  be  deposited  with  it  for  the  benefit 
and  protection  of  the  bondholders  should  any  loss  occur  from  fire  or  boiler 
explosion  during  the  term  of  this  indenture.  Any  payments  of  insurance 
made  under  such  policies  may  be  applied  directly  by  the  Trustee  to  the 
repairing  or  replacement  of  the  property  damaged  or  destroyed,  or  it  may 
authorize  the  Compressor  Company  to  contract  for  such  repairs  or  re- 
placements, and  pay  part  or  all  of  the  cost  thereof  from  said  insurance 
moneys.  The  Trustee  may  in  its  discretion  employ  such  insurance  moneys 
in  the  purchase  or  redemption  of  outstanding  bonds  as  set  forth  in  Section 
Fifteenth,  instead  of  expending  the  same  for  repairs  or  replacement  of 
property  damaged  or  destroyed. 

Tenth — The  Compressor  Company  covenants  and  agrees  that  it  shall 
and  will  at  all  times  keep  the  buildings,  structures,  and  appurtenances 
thereto,  or  any  replacement  or  replacements  thereof  in  good  order  and 
repair,  provided,  however,  that  in  the  event  of  total  destruction  of  any 
building,  the  Compressor  Company  may,  with  the  consent  of  the  Trustee, 
add  to  the  insurance  moneys  received  thereon  by  the  Trustee  sufficient 
cash  payments  to  release  the  special  property  upon  which  such  building 
was  situated,  under  the  terms  set  forth  in  Section  Fifth,  whereupon  the 
Trustee  shall  release  the  said  property  and  the  Compressor  Company  may 
dispose  of  the  same  at  its  discretion. 

Eleventh — The  Compressor  Company  covenants  and  agrees  that  when 
and  as  the  coupons  attached  to  the  bonds  issued  hereunder  are  paid,  the 
coupons  shall  be  cancelled,  and  that  no  purchase  or  sale  of  the  said 
coupons  or  advance  or  loan  upon  the  same,  made  on  behalf  of,  or  at  the 
request  of,  or  with  the  privity  of  the  said  Compressor  Company,  and  no 
redemption  of  the  said  coupons,  or  any  of  them,  by  any  guarantor  of  the 
payment  of  the  same,  shall  be  taken  or  operate  as  keeping  the  said 
coupons  alive  or  in  force  under  this  indenture  as  against  the  holders  of 
the  bonds  secured  hereunder  and  of  the  coupons  annexed  thereto. 

Twelfth — In  case  default  shall  be  made  in  the  payment  of  interest  on 
any  of  the  bonds  issued  hereunder,  and  such  default  shall  continue  for  a 
period  of  six  months  after  demand,  or  in  case  default  shall  be  made  in  the 
performance  of  any  other  covenant  or  condition  hereby  required  to  be 
kept  or  performed  by  the  Compressor  Company,  and  if  the  same  shall 


756 


FORMS   AND   PRECEDENTS 


continue  for  a  period  of  six  months  after  demand  made  for  such  per- 
formance, the  Trustee  may,  and,  upon  the  written  request  of  the  ma- 
jority in  amount  of  the  holders  of  the  bonds  then  outstanding,  shall  by 
written  notice  to  the  Compressor  Company,  declare  the  principal  of  all 
the  bonds  hereby  secured,  then  outstanding,  to  be,  and  the  same  shall 
thereupon  become  immediately  due  and  payable. 

Thirteenth — In  case  default  shall  be  made  in  the  payments  of  the 
principal  or  interest  of  any  of  the  said  bonds  when  the  same  is  due  and 
payable  according  to  the  tenor  thereof,  or  if  default  shall  be  made  in  the 
performance  of  any  other  covenant  or  condition,  hereby  required  to  be 
kept  or  performed  by  the  Compressor  Company,  and  if  any  such  default  in 
payment  or  performance  shall  continue  for  a  period  of  six  months  after 
demand  by  the  Trustee,  then  and  in  every  such  case  the  Trustee,  or  its 
successors  in  the  Trust,  may  by  its  attorneys  and  agents  enter  into  and 
upon  all  and  singular  the  premises  hereby  conveyed,  and  each  and  every 
part  thereof,  and  operate  and  conduct  the  business  of  the  said  Com- 
pressor Company  in  all  respects  as  the  said  Compressor  Company  might 
do  in  possession  of  the  same ;  and  may  collect  and  receive  all  rents,  in- 
come, revenue,  and  profit  to  be  derived  therefrom,  and  after  deducting  all 
proper  and  necessary  outlays  and  expenses  as  well  as  a  just  compensation 
for  its  own  services  and  for  the  services  of  such  attorneys,  agents,  and 
assistants  as  it  may,  in  its  discretion,  employ  for  any  of  the  purposes 
aforesaid,  said  Trustee  shall  apply  the  rest  and  residue  of  the  moneys 
received  by  it  pro  rata  to  the  payment  of  the  interest  due  upon  such  of 
said  bonds  as  shall  then  be  outstanding.  In  any  such  case  if  payment  of 
all  interest  and  any  principal  due  shall  be  made  in  full  and  no  suit  to 
foreclose  this  mortgage  shall  have  been  begun  or  sale  made,  the  said 
Trustee  shall  restore  the  possession  of  the  premises  so  entered,  to  the 
Compressor  Company  without  prejudice  to  similar  entry  later  in  case  of 
similar  default. 

Fourteenth — In  case  default  shall  be  made  in  the  payment  of  the  prin- 
cipal or  interest  of  the  said  bonds,  when  the  same  is  due  and  payable 
according  to  the  tenor  thereof,  or  if  default  shall  be  made  in  the  perform- 
ance of  any  other  covenant  or  condition  hereby  required  to  be  kept  or  per- 
formed by  the  Compressor  Company,  and  if  any  such  default  in  payment 
or  performance  shall  continue  for  the  period  of  six  months  after  demand, 
the  Trustee  may,  and  upon  written  request  of  the  holders  of  a  majority  in 
amount  of  the  registered  bonds  then  outstanding,  being  first  indemnified 
by  them  to  its  satisfaction,  shall  sell  or  foreclose  upon,  according  to  the 
proceedings  by  law  prescribed  in  this  state,  all  or  any  portion  of  the 
property  held  by  it  under  this  indenture,  and  such  proceedings  of  sale  or 
foreclosure  shall  be  a  perpetual  bar  both  at  law  and  in  equity  against  the 
Compressor  Company  and  against  all  persons  claiming  by,  from,  or  under 
it.  After  deducting  from  the  proceeds  of  such  sale  or  foreclosure,  th( 
proper  allowance  for  all  expenses  thereof,  including  attorney's  and  counsel 
fees,  and  all  other  expenses  or  advances  which  may  have  been  made  or 
incurred  by  said  Trustee  in  respect  of  the  said  property  or  the  appur- 
tenances thereto,  and  all  payments  which  may  have  been  made  by  it  for 
taxes  or  assessments,  or  in  satisfaction  of  charges  and  liens,  prior  to  the 
lien  of  the  mortgages  and  deeds  of  trust  to  the  Trustee  thereon,  or  for 
insurance,  as  well  as  reasonable  compensation  for  its  own  services,  the 
Trustee  shall  apply  the  proceeds  to  the  payments  of  such  bonds  and  the 
coupons  thereon  as  may  be  at  the  time  unpaid,  without  giving  preference 


CORPORATE   BOND   ISSUES 


757 


or  priority  to  one  bond  over  another,  but  ratably  to  the  aggregate  amount 
of  such  unpaid  principal  and  accrued  and  unpaid  interest,  and  if  any  sur- 
plus remain  after  the  payment  in  full  of  the  principal  and  interest  of  said 
bonds,  then  the  Trustee  shall  transfer  and  pay  over  such  surplus  to  the 
Compressor  Company, 

Fifteenth — It  is  covenanted  and  agreed  between  the  parties  hereto  and 
any  future  holders  of  the  bonds  that  the  said  bonds  are  redeemable,  at  the 
option  of  the  party  of  the  first  part,  on  any  interest  day  after  the  first  day 
of  December,  1922,  at  one  hundred  and  ten  per  cent  of  their  face  plus 
accrued  interest,  provided  that  thirty  days'  notice  of  such  redemption  shall 
be  given  the  holders  thereof,  by  notice  published  once  a  week  for  four 
consecutive  weeks  prior  to  such  redemption,  in  a  newspaper  in  New 
York  City.  If  said  bonds  are  registered,  then  a  copy  of  the  said  notices 
shall  be  sent  to  the  post-office  address  of  the  parties  in  whose  names  said 
bonds  are  registered. 

Whenever  it  is  desired  to  redeem  any  of  said  bonds,  the  Board  of 
Directors  of  the  Compressor  Company  shall  pass  a  resolution  setting 
forth  the  amount  of  bonds  (at  their  par  value)  desired  to  be  redeemed. 
The  President  of  the  Compressor  Company  shall  thereupon  draw  by  lot 
the  numbers  of  the  bonds  to  be  redeemed,  and  he  shall  thereupon  certify 
that  such  bonds  were  drawn  for  redemption,  which  certificate  shall  be 
entered  upon  the  minutes  of  the  Compressor  Company,  and  a  duplicate 
copy  shall  be  delivered  to  the  Trustee.  Said  bonds  having  been  so  drawn 
for  redemption  shall  become  due  and  payable  on  the  succeeding  interest 
payment  date,  provided  that  the  date  of  first  publication  and  the  date  of 
mailing  notice  to  registered  holders  of  bonds  hereinbefore  provided  for 
shall  have  been  not  less  than  thirty  days  prior  to  such  interest  payment 
date,  and  the  said  bonds  shall  from  such  interest  payment  date,  cease  to 
draw  interest,  and  the  said  Compressor  Company  may,  upon  the  deposit 
of  the  proper  amount  with  the  Trustee,  be  privileged  to  consider  said 
bonds  as  paid  and  cancelled. 

Sixteenth — The  Trustee  may  resign  the  trust  hereby  created  upon 
giving  sixty  days*  notice  in  writing  to  the  Compressor  Company.  In  case 
of  the  resignation  of  the  Trustee,  or  of  its  dissolution  or  insolvency,  or 
removal  for  cause  as  Trustee  hereunder,  it  shall  be  the  duty  of  the  Com- 
pressor Company  to  call  a  meeting  of  the  bondholders  by  printed  notice, 
published  in  two  of  the  public  newspapers  of  New  York  City,  once  a 
week  for  three  consecutive  weeks  next  preceding  such  meeting,  calling 
such  meeting  to  be  held  in  the  said  City  of  New  York,  and  by  mailing 
notice  of  the  same  to  each  of  the  registered  bondholders  not  less  than  ten 
days  before  the  date  of  such  meeting.  At  the  time  and  place  specified 
in  such  notice,  the  holders  of  said  bonds,  in  such  meeting  assembled,  shall 
organize  and  proceed  to  elect  a  suitable  corporation  to  act  as  Trustee 
under  this  agreement,  and  a  majority  in  amount  of  such  bonds  legally 
represented  at  such  meeting  shall  be  competent  to  elect  such  new  Trustee, 
and  the  corporation  so  elected  shall  immediately  upon  election  and  on  its 
acceptance  in  writing  of  such  trust  become  vested  with  all  the  estate, 
trusts,  rights,  powers,  and  duties  of  the  present  Trustee  herein,  and  shall 
be  entitled  to  receive  from  the  present  Trustee  or  its  legal  representa- 
tives all  moneys,  mortgages,  and  assurances  appertaining  or  relating  to  this 
trust  and  the  due  execution  thereof. 

Seventeenth — It  is  covenanted  and  agreed  by  the  parties  hereto,  and 
all  the  holders  of  bonds  hereunder,  as  conditions  precedent  to  the  accept- 


-r^g  FORMS   AND   PRECEDENTS 

ance  of  the  said  trust  by  the  said  Trustee,  or  any  successor  thereto,  as 
follows : 

The  Trustee  shall  not  be  answerable  for  any  act,  default,  neglect,  or 
misconduct  of  any  of  its  agents  or  employees,  by  it  appointed  or  employed, 
in  connection  with  the  execution  of  any  of  the  said  trusts,  nor  in  any 
other  manner  answerable  or  accountable,  under  any  circumstances  what- 
soever, except  for  bad  faith.  The  recitals  contained  herein,  or  in  the 
bonds,  as  to  priority  of  lien,  or  any  other  matter  whatsoever,  are  made  by 
and  on  the  part  of  the  Compressor  Company,  and  the  Trustee  assumes 
no  responsibility  for  the  correctness  of  the  same.  It  shall  not  be  the  duty 
of  the  Trustee  to  file  or  record  at  any  time  this  deed  of  trust  or  any  other 
mortgages  or  deeds  of  trust  that  may  be  required  hereunder,  nor  to  do 
any  other  act  or  acts  suitable  and  proper  to  be  done  for  the  creation  or 
continuance  of  the  lien  or  liens  thereby  intended,  nor  to  effect  insurance 
against  fire  or  explosion,  nor  to  renew  any  policies  of  insurance,  nor  to 
keep  itself  informed  as  to  the. payment  of  any  taxes  or  assessments,  nor 
to  require  such  payments  to  be  made.  The  Trustee  may,  however,  in  its 
discretion,  do  any  or  all  of  these  things.  Neither  shall  the  Trustee  be 
held  responsible  for  the  nature  or  amount  of  the  security  mortgaged  to  it 
hereunder.  The  Trustee  shall  not  be  compelled  to  take  any  action,  as 
Trustee,  under  this  mortgage,  unless  properly  requested  and  in  every 
respect  indemnified  to  its  full  satisfaction.  The  Trustee  shall  be  entitled 
to  reasonable  compensation  for  all  services  rendered  hereunder  or  in  con- 
nection with  the  trust.  This  compensation,  together  with  any  and  all  nec- 
essary and  reasonable  expenses,  charges,  counsel  fees,  and  other  dis- 
bursements incurred  by  the  Trustee  in  the  discharge  of  its  duties,  as  such, 
shall  be  paid  by  the  Compressor  Company,  or  out  of  the  trust  estate 
upon  which  they  are  hereby  made  a  lien,  prior  to  that  of  the  bonds  issued 
hereunder.  The  Trustee  shall  be  protected  in  acting  upon  any  notice, 
consent,  request,  certificate,  bond,  or  other  paper  or  document  believed 
by  it  to  be  genuine  and  due  authentication  by  certificate  of  the  bonds 
issued  hereunder,  and  for  the  custody  and  disposition,  as  herein  provided, 
of  the  securities  and  moneys  received  by  it  hereunder. 

Eighteenth — It  Is  covenated  and  agreed  between  the  parties  hereto 
that  the  words  "Compressor  Company"  when  used  in  these  presents  mean 
the  party  issuing  the  bonds  herein  referred  to;  that  the  word  "Trustee" 
means  the  corporation  charged  with  the  execution  of  the  trust  herein, 
whether  the  same  be  the  Securities  Trust  Company  of  the  City  of  New 
York,  or  any  successor  or  successors  in  the  trust  hereby  created;  that  the 
word  "bonds"  means  the  bonds  issued  hereunder;  and  the  words  "Trus- 
tee," "bond,"  "bondholder,"  and  "holder"  shall  include  the  plural  as  well 
as  the  singular  number  and  the  term  "majority"  shall  signify  the  majority 
in  amount. 

Nineteenth — It  is  covenanted  and  agreed  that  this  indenture  may  be 
executed  in  several  counterparts,  each  of  which  so  executed  shall  be 
deemed  to  be  an  original,  and  such  counterparts  shall  together  constitute 
but  one  and  the  same  instrument. 

In  Witness  Whereof,  the  Maxwell  Compressor  Company  has 
caused  its  corporate  name  to  be  hereunto  subscribed 
by  its  President  and  its  corporate  seal  to  be  affixed  and 
attested  by  its  Secretary,  and  the  Securities  Trust  Com- 
pany of  the  City  of  New  York,  in  token  of  its  accept- 
ance of  the  trust  hereby  created,  has  caused  its  corporate 


CORPORATE   BOND   ISSUES  759 

name  and  seal  to  be  hereunto  affixed  by  its  President,  and 
attested  by  its   Secretary,  on  this  twelfth  day  of  Novem- 
ber, one  thousand  nine  hundred  and  seventeen. 
Maxwell  Compressor  Company, 
I  CORPORATE  7  By  Howard  M.  Maxwell, 

^       SEAL      ]  •  President 

Attest : 

Frank  Paulson, 

Secretary 

Securities  Trust  Company 
of  the  City  of  New  York, 

As  Trustee 
I  corporate  7  By  Malcolm  McDougald, 

(      seal      j  President 

Attest: 

Frank  G.  Cooper, 
Secretary 
(Notarial  acknowledgment  by  president  of  each  corporation  as  given 
in  Form  181.) 


It  will  be  understood  that  the  preceding  form  has,  on  ac- 
count of  space  limits,  been  reduced  to  its  simplest  terms.  It 
is,  however,  a  good  working  model  and  will  afford  an  excel- 
lent basis  upon  which  to  build  up  a  more  elaborate  instrument 
when  required. 


INDEX 

(References  are  to  pages.) 


Accounts,  corporate  books,  355 
Acknowledgment  of  charter,  182 

Forms,  550 
Adjournment, 
annual   meeting   of   stockholders, 

323 
directors'  meetings,  340 
special  stockholders'  meetings,  330 
Administrators, 

transfer  of  stock  to,  294 
Adoption, 
by-laws,  246 
by  directors,  121 
Advantages  of  corporate  form,  3-12 
Affidavit, 
corporate  statements,  725 

Forms,  725 
minutes,  724 
Forms,  724 
service  of  notice,  719 
Forms,  719 
Agents,  transfer  of  stock  to,  293 
Agreements,   (See  also  "Contracts") 
among  incorporators,  33 
options,  35,  625 

Forms,  625-629 
subscription,  29 
underwriting,  30 
Amendment, 
by-laws,  237 
charter,  112,  186-187 

Forms,  545 
minutes,  347 
Annual    meetings    of    stockholders 
(See  "Meetings,  stockholders") 

76] 


Annual  reports     (See  "Reports") 
Assessment, 
instalment  notice,  689 

Forms,  689 
stock,  notice,  690 

Forms,  690 
Assets, 

capitalization  of,  59 
distribution  of,  on  dissolution,  108 
preference  of  preferred  stock,  82 
sale  of,  in  consolidations,  508 
stockholders'  consent  to  sell,  113 
Assignment, 

assent  to,  of  contract,  733 

Forms,  733 
contract,  732,  734 

Forms,  732,  734 
patent,  734 

Forms,  734 
stock  certificates,  261,  271 

Forms,  600 
subscription,  594,  622 

Forms,  594,  622 
voting  trustees'  certificate,  608 

Forms,  608 
Associations, 
partnership,  516-518 
under  deeds  of  trust,  520-532 

express  trusts,  520 
voluntary,  517,  520 

advantages,  532 

liability,  526 

liability  to  taxation,  530 

Massachusetts,  523 

nature,  524 

regulation,  529 


762 


INDEX 


Attorney,  power  of     (See  "Power 

of  attorney") 
Auditor, 
duties,  229 

relation  to  treasurer,  363 
Audits,  for  protection  of  stockhold- 
ers, 482 

B 

Ballot,   annual   meetings   of   stock- 
holders, 672 
Forms,  672 
Bank  deposits, 

by-law  provisions,  235 
Bill  of  sale,  corporate,  731 

Forms,  731 
Board  of  directors      (See  "Direc- 
tors") 
Bond, 
treasurer's,  375*386,  739 
Forms,  739 
Bond  of  indemnity,  280,  739 

Forms,  739,  741 
Bonds, 

as  dividends,  410 
authorization,  425 
car  trust,  441 
collateral  trust,  441 
convertible,  439 
coupon,  428,  746 

Forms,  748 
debentures,  426 
deeds  of  trust,  430,  751 
Forms,  751 
execution  and  filing,  433 
recitals,  431 
Forms,   731 
first  mortgage,  438 
form,  428,  746 

Forms,  748-751 
gold,  439 
guaranteed,  441 
income,  440 
investment  value,  437 


issue  of,  in  place  of  stock,  66 

junior  lien,  439 

kinds,  438 

liability  of  vendor,  435 

mortgage,  427 

nature,  423 

price,  434 

purchase  money,  442 

redemption,  436 

registered,  747  ^ — ^ 

rights  of  holders,  435    i  " 

sale,  434 

sinking  funds,  433 

statutory  provisions,  425 

terminal,  441 

trustee's  certificate,  429 

Forms,  750 
Bondsmen,  liability,  382 
Books, 
closing,  269 
corporate,  342 

accounts,  355 

accounts,  audit  of,  482 

inspection  by  stockholders,  108 
dividend,  'J2>7 

Forms,  738 
instalment,  736 

Forms,  736 
minute, 

contents,  343 

form  and  subject  matter,  344 

size,  342 
stock  book,  198,  265 
stock  certificate,  263 
stock  ledger,  265 
stock  records,  261-271 
transfer,  198,  261,  267 
Business  organizations,  3 
By-laws,  188-194 

Forms,  573,  576 
adoption, 

directors'  meeting,  121 

stockholders'  first  meeting,  246 
amendment,  2.2P 


INDEX 


;63 


By-laws — Continued 

arrangement,  192 

certification  of  transcript,  722 
Forms,  722 

directors,  211-217 

dividends,  233-235 

enforcement  by  means  of  penal- 
ties, 236 

finance,  233-235 

first,  adoption,  194 

fimctions,  188 

lost  certificates,  200 

ofl5cers,  225-232 

power  to  make,  190 

power  to  pass  by  directors,  168, 
217 

preferred  stock,  199 

preparation,  193 

pro\4sions   relating  to   treasurer, 

351 
registrar,  197 

standing   committees,   218-224 
stockholders,  201-207 

right  to  adopt,  112 

right  to  amend,  112 

right  to  repeal,  112 
stock  provisions,  195-200 
subject  matter,  189 
transfer  agent,  197 
transfer  of  stock,  197 
treasury  stock,  199 


Calendar,  corporate,  742-745 

Forms,  743-745 
Call  and  waiver  of  notice, 
directors', 
first  meeting,  620 

Forms,  619 
special  meeting,  335 
stockholders', 
first  meeting,  613 
Forms,  613 


special  meetings,  631 
Forms,  632 
Call  of  directors'  meetings, 
call  and  waiver,  638-640 
Forms,  638-640 
Call  of  stockholders'  meetings,  ^ 
call  and  waiver,  632 

Forms,  632 
directors'  call,  634 

Forms,  634 
directors'  instructions  for,  634 

Forms,  634 
directors*  resolution  for,  635 

Forms,  635 
president's  call,  633 

Forms,  633 
stockholders'  call  for,  637 

Forms,  637 
stockholders'  request  for,  636 
Forms,  636 
Called  meetings, 

stockholders,  325 
Capital,  (See  also  "Capitalization") 
ease  of  securing,  under  corporate 
form,  10 
Capitalization,  58-67 
at  less  than  real  ^-alues,  61 
at  real  values,  62 
based  on  earning  cai>acity,  62 
basis  of,  58 
bond  issues,  66 
form,  65 
good- will,  64 

incorporated  i)artnership,  490 
Capital   stock,  58,  68-77    (See  also 

"Capitalization") 
Car  trust  bonds,  441 
Certificate, 

election  of  officers,  722 

Forms,  722 
election  of  treasurer,  721 
Forms,  721 


764 


INDEX 


Certificate — Continued 
inspectors  of  election,  670-671 
Forms,  670-671 
acknowledgment,  671 
Forms,  671 
of  incorporation   (See  "Charter") 
service  of  notice,  718 

Forms,  718 
stock,  73,  196,  595-597     (See  also 
"Stock") 

Forms,  598,  599 
adoption,  252 
assigned  complete,  271 

Forms,  600 
assigned  in  blank,  271 
assignment,  261 
assignment  of  only  a  portion, 

274 
certificate  book,  263 
full-paid  stock,  94 
lost,  200,  280 
lost,  indemnity  bond,  741 

Forms,  741 
lost,  procedure,  276 
trustee's,  on  bonds,  429 
Certifications,   718-723 

Forms,  718-723 
Certified  list, 

stockholders,  205 
Charter,  137-143 
Forms,  543,  55i 
amendment,   186-187 

Forms,  545 
application  for,  143 
board  of  directors,  165-171 
business  corporations,  139 
certified  copies,  184 
classification  into  stock  and  non- 
stock, 139 
classification  of  stock,  159,  176 
common  stock,  160 
corporate  stockholding,  177 
cumulative  voting,  174 
details,  142 


execution  and  filing,  181-185 
filing,  183 

financial  corporations,  141 
limitation  on  indebtedness,  178 
limitations  on  majority,  482 
location  and  duration  of  corpora- 
tion, 162-164 
name,  149- 1 53 
nature,  137 
preferred  stock,  161 
public  utility  corporations,  140 
purposes,  154-158 
reception,  first  meeting  of  stock- 
holders, 245 
signing  and  acknowledgment,  182 

Forms,  550 
special  provisions,  172-180 
special  purpose  clauses,  555 

Forms,  555-572 
special  rights  to  stockholders,  no 
stock  clauses,  159-160 
stockholders'  right  to  amend,  112 
sundry  provisions,  180 
Checks, 
corporate,  708 
Forms,  708-711 
countersigned,  709 

Forms,  709 
dividend,  711 
Forms,  711 
draft  form,  710 

Forms,  710 
official  signature,  710 

Forms,  710 
signature,  708 
Forms,  708-710 
Clayton  Act,  457 
Close  corporations,  499-505 
Collateral  trust  bonds,  441 
Combinations,  510 
Committees, 
finance, 
relation  to  treasurer,  360 
scope  and  power,  360 


INDEX 


765 


Committees — Continued 
on  by-laws, 

report,  688 
Forms,  688 
standing, 

appointment,  220 

appointment  by  board  of  direc- 
tors, 120,  170 

by-law  provisions,  218-224 

composition,  221 

meetings,  340 

powers,  222 

procedure,  223 

purpose,  218 
Common     stock,     76,       (See     also 

"Stock") 

Forms,  598 
charter  provisions,  160 
used     to     capitalize     anticipated 

earnings,  63 
Companies,  joint-stock,  513 
Consent  meetings, 
directors',  336,  638 

Forms,  639 
stockholders',  328 
Consolidations,  506-510 

Forms,  506 
lease  of  property,  508 
purchase  controlling  interest,  509 
sale  or  lease  of  assets,  508 
statutory,  507 

procedure,  507 
Contracts,  730,     (See  also  "Agree- 
ments") 

Forms,  730 
assent  to  assignment,  733 

Forms,  733 
assignment,  732,  734 

Forms,  732-734 
assignment  of  patents,  734 

Forms,  734 
corporate  bill  of  sale,  731 

Forms,  731 
subscription,  23,  26 


Contracts  prior  to  organization,  31- 
38 
agreements  among  incorporators, 

33 
effect  of   failure  to  incorporate, 

37 
options,  35 
promoters',  34 

status  of  contracting  parties,  32 
trustees'  contracts,  36 
Controlling  interest, 

consolidation  by  purchase  of,  509 
Convertible  bonds,  439 
Convertible  stock,  88 
Corporate  books     (See  "Books") 
Corporate  calendar,  742-745 

Forms,  743-745 
Corporate  form, 
advantages,  3-12 

attractiveness  to  investors,  10 

characteristic  features,  4 

ease  securing  capital,  10 

legal  entity,  6 

limited  liability,  5 

mechanism,  8 

permanence,  7 

transferable  shares,  8 
disadvantages,  13-19 

legislative  burdens,  13 

reports,  15 

taxes,  15 
Corporate  funds,  390-395 
collections,  390 
custody  of,  392 
disbursement,  393 
return  by  treasurer,  395 
status  of  treasurer  as  to,  391 
Corporate  name,  149-153 
changing,  152 
how  secured,  149 
incorporating   a  partnership,  489 
legal  right,  151 
selection,  150 


y66 


INDEX 


Corporate  purposes,  154-158 
comprehensive,   155 
illegal,  156 
single,  154 
special  charter  clauses,  555 

Forms,  555-572 
ultra  vires  acts,  157 
Corporate  seal,  236 
attested,  705 
Forms,  705-707 
Corporate  signature,  703-707 

Forms,  704-707 
Corporations, 
authorization  to  hold  stock,  452 
close,  499 
conduct,  499 

minimum  number  of  stockhold- 
ers, 502 
restriction  on  sale  of  stock,  503 
consolidations,  506-510 
corporate  signatures,  703-707 

Forms,  704-707 
directors  dealing  with,  127 
dissolution,  511 
domestic,  40,  162 
duration,  162-164 
foreign,  40,  162 
holding,  450-459 
holding  stock  of  another,  177 
illegal  promotion,  462 
incidental  powers  to  hold  stock, 

451 
liability    for    expenses    of    pro- 
moters, 469 
location,  162-164 
organization  of,  239 
parent  companies,  458 
principal  office,  162 
quasi,  517 

relation  to  promoters,  461 
reorganizations,  510 
selection  of  state,  162 
special  provisions  in  charter,  172- 
180 


status  upon  organization,  31 
system  of  management,  8 
transfer  of  stock  to  and  by,  297 
what  holdings  carry  control,  453 

Cost  of  incorporation,  49-57 

Counsel,  duties,  229 

Coupon  bonds,  428,  746 
Forms,  748 

Coupons,  form  and  nature,  429,  747 
Forms,  750 

Cumulative  dividends,  82 

Cumulative  voting,  174,  320 
as  charter  provision,  174 
protecting  the  minority,  477 


Debenture  bonds,  426 
Debt     (See  "Indebtedness") 
Deeds  of  trust,  430 
Forms,  751 
associations  under,  520-532 
execution  and  filing,  433 
recitals,  431 
Forms,  751 
Depository, 
certification  of   resolution  desig- 
nating, 720 
Forms,  720 
directors'  resolution,  256 
Forms,  616 

secretary's  certificate  to,  623 
Forms,  624 
Deposits     (See  "Bank  deposits") 
Directors, 
adoption  of  by-laws,  I2i 
appointment      of      officers      and 

agents,  120 
authority,  167 
board  of,  165-171 
by-law  provisions,  208-217 
classification,  169,  210 
close  corporations,  500 


INDEX 


767 


Directors — Continued 

common  law  liability,  122 

compensation,  216 

continuing  in  office  until  succes- 
sor elected,  126 

dealing  with  corporation,   127 

declaration  of  dividends,  396 

election,  205,  246,  318 
cumulative  voting,  478 
of  officers,  215 

equality  in  partnership  incorpora- 
tion, 494 

first  meetings,      (See  "Meetings, 
directors") 

general  powers,  210 

liability  for  illegal  dividends,  420 

meetings     (See  "Meetings,  direc- 
tors") 

number,  166 
by-laws,  208 

power  to  pass  by-laws,  168,  217 

powers,   1 18-127 

qualifications,  165 
by-laws,  208 

relation  to  treasurer,  358 

removal,  124,  211 

of  officers  and  agents,  120,  216 

report  from  treasurer,  387 

resignations,  124,  698-701 
Forms,  698-701 

special    meetings,      (See    "Meet- 
ings, directors' ") 

standing  committees,  170,  218-224 
appointment,  120 

statutory  liability,  122 

stockholders'  right  to  elect,  113 

term  of  office,  210 

vacancies  on  board,  125,  211 
Disadvantages    of   corporate   form, 

13-19 
Dissolutions,  511 

corporation,     effected    by    stock- 
holders, 114 

distribution  of  assets,  108 


Dividends,  396-422 

book,  737 
Forms,  737 

by-law  provisions,  233 

cash,  408 

check,  418,  7n 
Forms,  711 

compelling  the  declaration,  402 

cumulative,  82 

declaration,  396 

declared  out  of  capital,  123 

equality,  401 

example  of  by-law  provision,  396 

form,  407 

general,  participation  in  by  pre- 
ferred stock,  84 

illegal,  419 

in  bonds,  410 

in  stock,  409 

legal  remedies,  485 

liability  for  illegal,  420 

not  in  cash,  408 

notice  of,  413 
Forms,  691-695 

payment,  417 

power  of  attorney  to  receive,  726 
Forms,  726 

profits  as  proper  source,  399 

property,  412 

receipts,  713 
Forms,  713 

scrip,  411 

status  of  declared,  404 

stockholders'  right  to,  106 

to  whom  payable,  414 

treasurer's  liability,  421 
Domestic  corporations,   162 
Domestic  incorporation,  40 
Draft,  corporate,  712 

Forms,  712 
Dummy  incorporators,  147 


768 


INDEX 


Earnings, 

capitalization  based  on,  62 
Election, 

directors,  318 
stockholders'  right,  113 

voting,  319 
Executors, 

transfer  of  stock  to,  294 
Express  trusts,  520 


Fees, 

avoiding,  52 

counsel,  56 

organization,  49 
Finance  committee, 

relation  to  treasurer,  360 

scope  and  powers,  360 
Finances     (See  "Corporate  funds") 
First  meetings     (See  "Meetings") 
Foreign  corporations,  162 

taxes  on,  18 
Foreign  incorporation,  40 
Founders'  shares,  89 
Franchise  taxes,  16 

comparative  table  of,  50 
Full-paid  stock,  91-95 

legal  status,  93 
Funds,  corporate,  390-395 


Gold  bonds,  439 
Good-will, 

capitalization  of,  64 
Guaranteed  bonds,  441 
Guardians, 

transfer  of  stock  to  and  by,  297 


Holding  corporations,  450-459 
advantages,  450 
authorization  to  hold  stock,  452 


combinations,  510 
function    in    industrial    combina- 
tions, 455 
limitations,  456 
parent  companies,  458 
what  holdings  carry  control,  453 


Income  bonds,  440 
Income  taxes,  state,  16 
Incorporation, 
certificate  of     (See  "Charter") 
cheap,  44 

contracts  prior  to,  31-38 
cost  of,  49-57 

comparative  table,  50 
corporate  equipment,  57 
domestic,  40 
failure   to  incorporate,   effect  on 

contracts,  ^y 
foreign,  40 
liabilities     imposed    in     different 

states,  46 
partnership,  488-505 
board  of  directors,  494 
capitalization,  490 
classification  of  stock,  497 
close  corporations,  499 
exchange  of  property  for  stock, 

492 
maintenance  of  agreed  manage- 
ment, 496 
name,  489 
officers,  499 

restriction  on  sale  of  stock,  503 
stock  adjustments,  493 
voting  requirements,  497 
voting  trust,  496 
reputation  of  different  states,  45 
selecting  state,  39-48 
general  rules,  47 
Incorporators,   144-148 
agreements  among,  23 
as  stockholders,  146 


INDEX 


769 


Incorporators — Continued 

dummy,  147 

functions,  146 

legal  qualifications,  144 

number,  145 
Indebtedness, 

limitations  on,  234 
in  charter,  178 
Indemnity  bond  for  lost  certificate, 

741 

Forms,  741 
Indorsement, 

stock  certificate,  271 
Inheritance  taxes,  17 
Inspectors  of  election, 
certificate,  670-671 
Forms,  670-671 
acknowledgment,  671 
Forms,  671 
oath  and  report,  614,  670 
Forms,  615,  670 
Instalment, 
book,  736 

Forms,  736 
notice,  689 
Forms,  689 
Investment  value  of  bonds,  437 
Investors, 

corporate  form  attractive  to,  10 
provisions    for    under    suggested 
stock  partnership,  535 


Joint  adventures,  519 
Joint-stock  companies,  513-516 

disadvantages,  514 
Junior  lien  bond,  439 

L 

Liabilities, 
directors', 

common  law,  122 

statutory,  122 
imposed  in  different  states,  46 


ofiicers*,  132 
stockholders',  5,  115 
Liability, 

limited,  of  corporate  form,  5 
Lien  of  corporation  on  the  shares 

of  its  stockholders,  286 
Limited  liability,  characteristic  fea- 
ture of  corporate  form,  5 
List, 

stockholders',  667 

Forms,  667 
subscription,  22-30 
Location  of  corporation,  162-164 


Meetings,  directors',  212,  331-340 
adjournment,  340 
assembling,  332 
consent  meetings,  336,  638 

Forms,  639 
first,  249-257 

acceptance  of  subscriptions,  253 
adoption  of  stock  certificate,  252 
call,  249 

Forms,  623 
call  and  waiver  of  notice,  620 

Forms,  619 
depository,  255 

Forms,  616 
election  of  officers,  251 
exchange  of  stock  for  property, 

254 

Forms,  621 
minutes,  250 

Forms,  616 
opening,  151 
treasurer's  bond,  255 
minutes,  342-349 
Forms,  678-681 
motions  and  resolutions,  656 

Forms,  660-666 
new  business,  339 
notice,  213 


770 


INDEX 


Meetings — Continued 
order  of  business,  217 
place,  331 
purposes,  332 
quorum,  337 
reading  of  minutes,  338 
reports,  338 
special, 
call,  333 

call  and  waiver  of  notice,  335, 
638-640 

Forms,  638-640 
notice,  334 
purposes,  332 
standing  committees,  340 
time,  331 

unfinished  business,  339 
Meetings,  stockholders',  201-207 
annual,  201,  306-324 
ballot,  672 
Forms,  672 
annual  reports,  317 
called,  325 

election  of  directors,  318 
ballot,  672 
Forms,  672 
first,  239-248,  609 
Forms,  610-616 
adoption  of  by-laws,  246 
call  and  waiver  of  notice,  613 

Forms,  613 
conducting,  242 
election  of  directors,  246 
exchange  of  stock  for  property, 

247 
inspectors'  oath  and  report,  614, 
670 

Forms,  615,  670 
minutes,  242 
Forms,  610 
opening,  244 
preparation  of  minutes,  242 

Forms,  610 
reception  of  charter,  245 


list  of  stockholders,  309,  667 

Forms,  667 
minutes,  342-349 

Forms,  669,  674-677 
motions  and  resolutions,  656 

Forms,  657-660 
notice,  203,  307 
officers,  203,  310 
opening,  311 

order  of  business,  207,  309 
preparation,  309 
proof  of  notice,  315 
proxies,  313 

Forms,  614 
quorum,  206,  314 
recording  proceedings,  345 
right  of  notice,  104 
roll  call,  311 
special,  202,  325-330 

adjournment,  330 

call,  325,  333,  632 
Forms,  632-637 

call  and  waiver  of  notice,  631 
Forms,  632 

consent  meetings,  328 

opening  formalities,  329 

special  business,  329 
Minority  stockholders, 
annual  audits,  482 
charter  limitations,  482 
classification  of  stock,  480 
cumulative  voting,  477 
encroachment  on  rights,  474 
legal  remedies,  484 
protection,  473-487 

measures,  476 
rights  at  common  law,  473 
special  arrangements,  481 
voting  trusts,  480 
Minors, 

transfer  of  stock  to  and  by,  296 
Minutes, 
amendment,  347 
approval,  347 


INDEX 


771 


Minutes — Continued 
book, 

contents,  343 

form  and  subject  matter,  344 

size  and  form,  342 
certification  of  transcript,  723 

Forms,  723 
directors'  first  meeting,  250 

Forms,  616 
directors'  meetings,  342-349 
Forms,  677-681 

reading,  338 
first  meeting,  stockholders',  242 

Forms,  610 
notarial  exemplification,  724 

Forms,  724 
outline  of,  at  stockholders'  meet- 
ings, 310 

Forms,  669 
president's  and  secretary's  certifi- 
cation, 723 

Forms,  723 
prepared  in  advance,  349 
reading,     stockholders'     meeting, 

316 
recording  proceedings,  345 
secretary's  affidavit,  723 

Forms,  724 
signing,  324 
stockholders'  meetings,  342-349 

Forms,  674-677 
Mortgage  bonds,  427 
Motions, 
directors'  meetings,  656 

Forms,  660-666 
stockholders'  meetings,  656 

Forms,  657-660 

N 

Name     (See  "Corporate  name") 
Non-assessable  stock,  94 
Notarial  acknowledgment,  725 
Forms,  725 


Notarial  exemplification  of  minutes, 

724 

Forms,  724 
Notes, 
corporate,  715-717 

Forms,  715-717 

collateral,  715-717 
Forms,  715-717 
short-term,  442 
Notice, 

affidavit  to  service  of,  719 

Forms,  719 
certificate  to  service  of,  718 

Forms,  718 
dividends,  413 

Forms,  691-695 
election  as  director,  695-696 

Forms,  695-696 
election  as  general  manager,  697 
instalment,  689 

Forms,  689 
meetings,  directors',  213,  646 

Forms,  646-647 

call  and  waiver,  335 
meetings,  stockholders',  203,  641 
Forms,  641-643 

annual,  307 
Forms,  643-646 

proof,  315 

rights,  104 

special,  327 
Forms,  642 
sale  of  delinquent  stock,  691 

Forms,  691 
stock  assessment,  690 

Forms,  690 


Oath  of  office, 
secretary's,  621 
Forms,  620 

Office, 
principal,  162 


77^ 


INDEX 


Officers,   128-134     (See  also  under 
individual  titles) 

appointment,  120,  128 

assistant,  230 

auditor,  duties,  229 

by-law  provisions,  225-232 

certificate  of  election,  ^22 
Forms,  ^22. 

counsel,  duties,  229 

de  facto,  133 

de  jure,  133 

delegation  of  powers,  231 

duties,  130 

duties  as  to  stock  transfers,  288 

election  by  board  of  directors,  215 

enumeration,  225 

incorporated  partnership,  499 

liabilities,  132 

managing,  229 

powers,  130 

president,  duties,  226 

presiding,  226 

qualifications,  129 

removal,  120,  133,  216,  232 

resignation,  133 

salaries,  231 

secretary,  duties,  227 

stockholders'  meetings,  310 

treasurer,  duties,  228 

vacancies,   232 
Option  agreements,  35,  625 

Forms,  625-629 
Order  of  business, 

directors'  meetings,  217 

stockholders'  meetings,  207 
Organization, 

business,  3 

fees,  49 

status  of  corporation  upon,  31 


Paid    up    stock      (See    "Full-paid 

stock") 
Parent  companies,  458 


Participation, 

by  stockholders,  in  new  stock  is- 
sue, 107 

of  preferred  stock  in  general  divi- 
dends, 84 
Partnership, 

capitalizing  on  incorporation,  490 

incorporation,  488-505 

transfer  of  stock  to  and  by,  300 
Partnership  associations,  516-518 
Partnership,    stock,   533-539 

advantages    of    suggested    form, 

537 
plan, 

as  to  managing  partners,  534 

provisions  for  investors,  535 
suggested  form,  533 
Par  value, 

stock  without,  70 

charter,  71 
Forms,  552 
Patent, 

assignment,  734 

Forms,  734 
Power  of  attorney,  726-730 

Forms,  726-730 
revocation,   730 

Forms,  730 
Preferred    stock,    76,    78-90      (See 

also  "Stock") 

Forms,  599 
by-law  provisions,  199 
charter  provisions,  161 
convertibility,  88 
cumulative  as  to  dividends,  82 
founders'  shares,  89 
nature  and  use,  78 
non-cumulative,   as  to  dividends, 

82 
no  right  of  foreclosure,  65 
participation  in  general  dividends, 

84 
preference  as  to  assets,  82 


INDEX 


111 


Preferred  stock — Continued 

preference  as  to  dividends,  8i 

redemption  right,  86 

voting  rights,  87 
President, 

annual  report  to  stockholders,  682 
Forms,  683 

corporate   and   ofl&cial    signature, 

703-707 

Forms,  704-707 
corporate  note,  715 

Forms,  715 
duties,  226 
resignation,  701 
Forms,  701 
Presiding  officers,  226 
Principal  office,  162 
Profits, 
promoters,  462 

proper  source  of  dividends,  399 
secret,  promoters,  464 
Promoters,   460-472 
agreements  with,  589 

Forms,  589 
contracts,  34 
deferred  sale  of  promoters*  stock, 

470 
function,  460 
illegal  arrangements,  462 
incidental  liabilities,  469 
legitimate    arrangements,   466 
profits,  464 

relation  to  corporation,  461 
sale  of  property  to  corporation, 

462 
secret  profits,  464 
Property  taxes,  16 
Proxies,  207,  313,  648-650 

Forms,  614,  650-655 
Public  utility  corporations, 

charter,  140 
Purchase  money  bonds,  442 
Purposes,  corporate     (See  "Corpo- 
rate purposes") 


Quorum, 

directors'  meetings,  214,  337 
stockholders'  meetings,  206,  314 


Receipts, 
corporate,  713-714 
Forms,  713-714 
stock  subscriptions, 
instalment  certificate,  594 

Forms,  593,  594 
treasurer's,  591 

Forms,  591,  592 
trustee's  certificate,  590 
Forms,  590 
Records, 
minutes  of  meetings,  342-349 
stock,  261-270 
Redemption  right,  preferred  stock, 

86 
Registered  bonds,  747 
Registrar,  197,  278 
Removal, 

directors,  124,  211 
officers,  133,  232 
Reorganizations,  510 
Reports, 

annual,  317,  682 

Forms,  683-688 
committee  on  by-laws,  688 

Forms,  688 
directors'  meeting,  338 
treasurer's,   387-389,  682 
Forms,  684-688 
Reserve  funds,  2^;^ 
Resignation, 

directors,  124,  698-701 

Forms,  698-701 
officers,  133 
president,  701 
Forms,  701 
treasurer,  701 
Forms,  701 


774 


INDEX 


Resolutions, 
certification,  720-723 

Forms,  y20-y2Z 
designating  bank, 
secretary's  certification,  720 
Forms,  720 
directors'  meetings,  656 

Forms,  660-666 
stockholders'    meetings,   656 
Forms,  657-660 
Rights      of     {stockholders        (See 

"Stockholders") 
Roll-call, 
directors'  meetings,  336 
stockholders'  meetings,  311 


Salaries, 
limitations  on,  in  charter,  179 
officers,  231 
restitution,  484 
Sale,  bill  of,  731 

Forms,  731 
Scrip  dividends,  411 
Seal, 
attested,  705 

Forms,  705-707 
corporate,  236 
Secretary, 

affidavit  to  minutes,  724 

Forms,  724 
affidavit  to  publication  of  notice, 
719 

Forms,  719 
certificate    to     resolution    desig- 
nating depository,  624 
Forms,  624 
certifications  of  resolutions,  720- 

723 

Forms,  720-723 
corporate    and   official    signature, 
703-707 
Forms,  704-707 


duties,  227 

list  of  stockholders,  667 

Forms,  667 
oath  of  office,  621 
Forms,  620 
Selection    of    state    for   incorpora- 
tion, general  rules,  47 
Shares     (See  "Stock") 
Signature, 
corporate  and  official,  703-707 
Forms,  704-707 
checks,  708-712 
Forms,  708-712 
testimonium  clause,  706 
Forms,  706-707 
Sinking  fund,  bond  issues,  433 
Special  meetings,    (See  "Meetings") 
Special    provisions, 

charter,  172-180 
Stamp  tax,  303 

Standing  committees     (See  "Com- 
mittees") 
State  income  taxes,  i6 
State  inheritance  taxes,  17 
Statutory  rights, 

of  stockholders,  iii 
Stock,    68-77      (See    also    "Certifi- 
cate,"  "Common   stock,"   "Pre- 
ferred stock,"  "Treasury  stock") 
adjustment  on  partnership  incor- 
poration, 493 
books,  198,  265 

Forms,  603,  604 
by-law  provisions,  195-200 
capital,  68 
certificate, 
adoption,  252 

assignment,  blank  and  complete, 
271,  292 
Forms,  600 
book,  263 
certificates,  73,  196,  595-597 
Forms,  598,  599 


INDEX 


775 


Stock — Continued 
certificates — Continued 

lost,  200 

lost,  indemnity  bond,  741 
Forms,  741 
classification,  77,  176,  480 

in  charter,  159 

incorporated  partnership,  497 
clauses  in  charter,  159-160 
close  corporations,  499 

restrictions  on  sale,  503 
common,  76 

Forms,  598 
convertible,  88 

corporate,  transferability  of,  8 
exchange  for  property,  247,  492 
founders',  89 
full-paid,  75,  91-95 

certificates  for,  94 

legal  status,  93 
issued,  75 
ledger,  265,  602 

Forms,  603 
non-assessable,  94 
of    other    corporations,    held    in 

treasury,  loi 
par  value,  69,  70 
pledges,  282 
preferred,  76  . 

Forms,  599 
records,  261-270 
scrip,  594 

Forms,  593,  594 
transfer,  197,  271-286 

books,  198,  267,  307,  601 
Forms,  601 

procedure,  271 

rules   regulating,   287-302 

tax,  303-305 

treasury  stock,  277 

who  may,  288 
treasury,  96-101 

definition,  96 

legal  status,  100 


origm,  97 

transfer  from  corporation,  100 

transfer  to  corporation,  99 

unissued,  73 

voting  trusts,  445-449 

watered,  91 
legal  status,  92 

without  par  value,  70 
charter,  71 
Forms,  552 
Stock  dividends,  409 
Stockholders,  102-117 

adopt  by-laws,  112 

amend  by-laws,  112 

amend  charter,  112 

as  incorporators,  146 

by-law  provisions,  201-207 

certified  list,  205 

classification  of  stock,  480 

consent  of,  to  sell  entire  assets, 
113 

dividend  rights,   106 

election  of  directors,  113,  205 

first    meeting,      (See    "Meetings, 
stockholders'  *') 

functions,  103 

inspection  of  books,  108 

liabilities,  115 

list  of,  309,  667 
Forms,  667 

loans  to,  of  corporate  money,  123 

meetings     (See  "Meetings,  stock- 
holders' ") 

minimum  number,  502 

minority,  protection,  473-487 

of  record,  261 

participation  in  assets  on  dissolu- 
tion, 108 

participation    rights,    new    stock, 
107 

powers.  III 

relation  to  treasurer,  358 

repeal  by-laws,  112 

report  from  treasurer,  388 


77^ 


INDEX 


Stockholders — Continued 
right  to  dissolve  corporation,  114 
rights,  103 

special  charter  rights,  no 
special  meetings    (See  "Meetings, 

stockholders' ") 
special  powers,  114 
statutory  rights,  in 
voting  rights,  104,  204 
Stock  partnership,  plan  for,     (See 

"Partnership,  stock") 
Stock  transfer  taxes,  18 
Subscription, 
acceptance  of,  253 
assignment,  594,  622 

Forms,  594,  622 
blanks,  28 

Forms,  585,  586 
contract, 

form,  26 

nature,  2;^ 
instalment  certificate,  593 

Forms,  593 
lists  and  contracts,  22-30 

Forms,  584,  587,  588 
treasurer's    receipt   for   payment, 

591 

Forms,  591,  592 
trustee's    receipt   for   stock   pay- 
ment, 590 

Forms,    590 
Syndicates,  519 


Taxes, 

annual  franchise,  16,  49 
comparative  table,  50 
annual  property,  16 
avoiding,  52 
income,  state,  16 
inheritance,  17 
on  foreign  corporations,  18 
organization,   16 


stock  transfer,  18,  303-305 
voluntary  associations,  530 
Terminal  bonds,  441 
Testimonium  clause,  706 

Forms,  706-707 
Transfer  agent,  197,  278 
Transfer  books,  198,  267,  307,  601 

Forms,   601 
Transfer  of  stock,  271-286 
duties  of  officers,  288 
general  form,  292 
liability  involved,  289 
on  books  of  corporation!',  261 
procedure,  271 
refusal  by  corporation,  289 
responsibility  of  corporation,  287 
restriction  on,  285 
rules  regulating,  287-302 
to  and  by, 

administrators,  294 

agents,  293 

corporations,  297 

executors,  294 

guardians,  297 

minors,  296 

partnerships,  300 

trustees,  295 
treasury  stock,  277 
who  are  qualified,  288 
Transfer  tax,  18,  303-305 
general   rulings,  304 
penalties,  303 
Treasurer, 
affidavit   to   corporate   statement, 

725 

Forms,  725 
assistant,  354 
authority,  350 
bond,  255,  375-386,  739 

Forms,  739 

amount,  378 

corporate  requirements,  376 

liability  of  bondsmen,  382 

nature,  377 


INDEX 


777 


Treasurer — Continued 
bond — Continued 

personal,  379 
Forms,  739 

statutory  requirements,  376 

surety  company,  380 

termination,  385 
books  of  account,  355 
by-law  provisions,  351 
certificate  of  election,  721 

Forms,  721 
corporate    and    official    signature, 

703-707 

Forms,  704-707 
corporate  funds,  390-395 

collections,  390 

custody  of,  392 

disbursement,  393 

return  of,  395 

status  as  to,  391 
corporate  note,  715 

Forms,  715 
directors'  resolutions,  354 
duties,  228,  350-357 

assumption,  355 

faulty  performance,  368 

primary,  350 
formality  giving  up  office,  357 
liabilities,  366-374 

as  agent,  366 

as  to  dividends,  421 

faulty  performance    of    duties, 
368 

illegal  acts,  371 

neglect  or  non-performance  of 
duties,  367 

statutory,  373 

to  whom,  366 

unauthorized  acts,  369 
powers,  350-357 
relation  to, 

auditor,  363 

board  of  directors,  358 

finance  committee,  360 


other  corporate  authorities,  358- 

365 
president,  364 
secretary,  364 
stockholders,  358 
report,  387-389,  682 
Forms,  684-688     , 
directors,  387 
stockholders,  388,  687 
Forms,  684-688 
resignation,  701 
Forms,  701 
Treasury   stock,   96-101      (See  also 
"Stock") 
by-law  provisions,  199 
legal  status,   100 
transfer,  99,  277 
Trustees, 

certificate  on  bonds,  429 

Forms,  750 
contracts  with,  36 

Forms,  587 
transfer  of  stock  to  and  by,  295 
Trusts,  express,  520 


U 


Ultra  vires  acts,  157 
Underwriting  agreements,  30,  471 


Vacancies, 

board  of  directors,  125,  211 

officers,  232 
Voluntary  associations, 

advantages,  532 

in  Massachusetts,  523 

liabilities,  526-532 

nature,  524 

regulation,  529 
Voting, 

cumulative,  174,  320 
as  charter  provision,  174 
protecting  the  minority,  477 


778 


INDEX 


Voting — Continued 

election  of  directors,  319 
incorporated  partnership,  497 
stockholders,  104,  204 
Voting  trusts,  445-449 
Forms,  606 
assignment  of  trustees*  certificate, 
608 

Forms,  608 
distinctions,   446 
how  formed,  446 
illegal,  449 


incorporated  partnership,  496 
legal  status,  448 
minority  protection,  480 
restrictions  of  stock  sales,  449 

W 

Waiver  of  notice,     (See  also  "Call 
and  waiver  of  notice") 
of  assessment,  616 
Forms,  616 
Watered  stock,  91 
legal  status  of,  92 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN     INITIAL     FINE     OF     25     CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.00  ON  THE  SEVENTH  DAY 
OVERDUE. 


A^"'     *     1933 


^ 


LD  21-50m-l,'3I 


/-w      KJL.  I 


